The FCA has published FG 20/1 as part of their approach to reducing the likelihood of market disruption, increasing the chances firms can put things right when they go wrong, and minimising harm if they fail and exit the market. It includes a range of information, so it is worth reading in more detail than this summary.

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The paper demonstrates the FCA's view that firms should have financial resources reflecting the risk of harm and complexity of their business. This should start with considering whether firms have enough assets to cover their liabilities and continue to also "count for" the potential cost of a risk having materialised; and finally there should be clear triggers identified which indicates that the business become non-viable (therefore facilitating orderly wind-down).

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Who does it apply to?

The requirements outlined in the paper allies to all FCA solo-regulated firms subject to threshold conditions and/or the Principles for Businesses. 

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What do firms need to do?

Firms should read the publication as it also provides additional information about "adequate financial resources". In line with the publications, firms should:

• ensure the governance and controls are robust enough to identify and manage risks

• set clear risk appetite

• conduct proportionate risk and financial adequacy assessment regularly (at least annually)

• prepare a wind-down plan

 

Whilst conducting an “adequate financial resource assessment”, consider:

• a forward-looking approach to risks and how these evolve throughout the economic cycle

• reflect the risks to which the firm is exposed and the amount of risk it poses; but be proportionate to the likelihood of the risks

• ensure ongoing financially soundness & avoiding excessive costs (which could hinder carrying on viable business)

• conduct such review at least annually, reflecting the fact that the business environment is dynamic so the assessments of risk and harm should be dynamic too.

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Link to the FCA's publication is available here.

 

If you have any questions about how this impacts you, or merely you want us to confirm your understanding or arrangements, please feel free to get in touch.