FCA: Fast-growing firms (FGFs) multi-firm review
The FCA has identified a number of critical risks within fast-growing firms. The review is applicable to all FCA authorised firms...
An overview.
"[FCA] our observations are relevant to all regulated firms that have grown rapidly or have plans to do so."
The FCA have conducted a multi-firm review of 25 FCA solo-regulated firms which had experienced fast growth over a 3-year period, they assessed the impact of this rapid growth on their financial and non-financial resources. The review focused on risk management practices, governance arrangements and adequacy of financial resources at firms across 3 business models.
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Whilst these were CFD providers, wealth managers and payment services firms, the FCA explicitly stated that the findings apply to all firms.
For most firms:
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Their risk management framework and governance arrangements have not kept pace with the growth in their business activities. While risk management practices at these firms may have been proportionate at authorisation, they had not evolved to scale with the business.
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Assessment of the adequacy of financial resources did not consider the growth in their underlying business resulting in financial resources assessments that were not commensurate with the size, business model and underlying risks.
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Wind-down plans were inadequate following the fast growth of these firms, increasing risk of harm in the event of firm failure.
Key Findings.
The FCA found that most firms did not update their risk management frameworks, resulting in an inadequate assessment of risks and the potential for harm. Some firms did not have capital and/or liquid assets commensurate with their size, complexity and growth in business. The main findings are summarised below.
Business model
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Unsustainable and inadequately planned growth creates longer term uncertainty around firms and weakens their financial resilience, increasing the risk of harm to consumers and the broader market.
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For some firms that are part of international groups, we saw significant risks due to intragroup dependencies for financial and non-financial transactions and outsourcing arrangements.
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Some firms had launched new products during the period such as cryptoassets, copy trading or fractional shares, without due consideration of the associated risks. This can leave both the firms and their clients vulnerable to risks which they have may not have considered adequately.
Governance, risk management and non-financial resources
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Many firms appeared to be unaware of the full range of regulatory requirements/ guidance and had not considered upcoming regulatory changes in their forward planning.
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Documents including capital/liquidity assessments and wind-down plans were not reviewed regularly.
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Many firms operated the 3 lines of defence model. However, we observed instances of structural weaknesses in the implementation of this model. There were instances where risk management appeared to be more of a compliance function rather than being actively engaged in challenging the firm on risks.
​Assessment of adequacy of financial resources- capital and liquid assets
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Most firms relied on prescribed regulatory minimum thresholds as their capital resource requirements. Their own assessment of resources was generally poor and did not cover the material risks and potential harms arising from their business activities.
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Most firms did not perform adequate stress testing or scenario analysis and did not consider the impact of a material decrease in the rate of growth.
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A small number of firms did not calculate the formulaic regulatory requirements correctly.
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Most firms did not understand their liquidity risks adequately. This resulted in weak liquidity risk management frameworks and inadequate assessments of their liquid assets requirement.
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Some firms appeared to be reliant on the group or parent for funding their activities on an ongoing basis.
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Most firms did not perform a meaningful liquidity stress test. These deficiencies in capital and liquidity assessments can adversely impact the ability of a firm to meet its liabilities at all times and continue as a going concern in times of stress. It can also result in an inability to pay redress to consumers in the case of upheld complaints.
Wind-down plans
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Most firms had significant deficiencies in wind-down plans. These plans lacked operational analysis and had inadequate resource assessment.
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There was a lack of consideration of events which are likely to make a firm unviable.
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Most firms did not have clear wind-down triggers and had optimistic assessments of the time required to complete the wind down. There was significant reliance on the income generated from divestments with inadequate consideration of the practical challenges involved.
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Most firms did not consider the impact of dependencies on other parts of the group. These factors can hinder the ability of a firm to wind down in orderly manner, resulting in serious harm to consumers and financial markets.
Expectation of Firms.
The FCA expect all fast-growing firms to continually identify, assess and manage the risks arising from their activities and associated growth. They must also hold adequate financial and non-financial resources to cover these risks and mitigate potential harm.
Regulated firms are expected to:
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Have robust plans in place to understand their likely future growth, and to maintain sufficient resources to manage growth or unexpected stress. It Is also expected that the risk management practices evolve in line with growth in business.
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Update their risk management framework and governance arrangements to ensure that they remain proportionate and fit for purpose. This should include consideration of the resourcing needs of risk, compliance and audit functions.
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Ensure that the assessment of adequacy of financial resources continues to be commensurate with the size, complexity and forecast growth of the business. This includes regular stress testing and scenario analysis, that is proportionate in nature.
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Embed a liquidity risk management framework including liquidity risk policies, controls, contingency funding plans and stress testing.
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To provide accurate and complete data in their regulatory submissions. Poor quality of regulatory data submissions can be an indicator of weaknesses in firms' systems and controls.
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