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  

• 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.

• 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.

• 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

• 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.

• Documents including capital/liquidity assessments and wind-down plans were not reviewed regularly.

• 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

• 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.

• 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.

• A small number of firms did not calculate the formulaic regulatory requirements correctly.

• 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.

• Some firms appeared to be reliant on the group or parent for funding their activities on an ongoing basis.

• 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

• Most firms had significant deficiencies in wind-down plans. These plans lacked operational analysis and had inadequate resource assessment.

• There was a lack of consideration of events which are likely to make a firm unviable.

• 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.

• 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.