16Dec

The Financial Conduct Authority has admitted that around 4,000 mostly small and medium sized firms within financial services could be at risk of failure as a result of the pandemic.

The FCA says these 4,000 firms have “low levels of financial resilience” and that 1,200 of these firms could cause “a higher degree of harm” to the market were they to fail. Only around 800 of these 1,200 firms would be covered by the Financial Services Compensation Scheme were the worst to happen. The FCA made these admissions in an exchange of letters between its chief executive Nikhil Rathi and Treasury Select Committee chairman Mel Stride MP.

These estimates were made at the end of October, and the regulator hopes that the position has improved slightly since then and will continue to improve. October 31 saw the announcement of increased Government support, and the massive nationwide vaccination programme is about to commence.

In his letter, Mr Rathi writes:

“In response to the crisis, we are monitoring the effects of economic downturn on firms’ solvency through 1) existing regulatory reported data; 2) enhanced data purchased from a third-party provider, 3) in-depth analysis of liquidity for a large number of the most significant firms and 4) data collection on the impact of Covid-19 on cashflow and income from 23,000 firms through our financial resilience surveys.

“We have rapidly increased our available data. We have used this to provide more granular monitoring across the majority of 49,000 firms we prudentially regulate to give an early warning about firms’ financial resilience.

“Alongside assessments of financial resilience, we have considered which types of firms could potentially cause the greatest economic harm in failure.

“We have prioritised consumer harm through loss of client assets or segregated funds, failure to pay redress claims/Ombudsman award and lack of FSCS cover.

“We are also considering the potential loss of access to services for particularly vulnerable markets and are generally concerned about any threats to competition and the effective functioning of markets.”

The FCA has been speaking about the importance of financial resilience since the start of the health crisis. On March 26, it told firms they should be “taking appropriate steps to conserve capital, and to plan for how to meet potential demands on liquidity,” advice which certainly remains every bit as relevant today.

Unfortunately, the FCA cannot intervene to assist firms who may be struggling. Its focus remains on protecting the interests of consumers, such as the obligation for mortgage and credit providers to grant additional payment deferrals to borrowers. Where a firm does fail, the FCA will seek to protect the interests of the firm’s customers and investors as much as possible.

On September 24, at the regulator’s annual public meeting, the FCA’s then interim chief executive Christopher Woolard said bluntly:

“We expect to see a number of business failures”.

On November 12, Mr Rathi gave his first speech since taking the permanent CEO role, and said:

“The financial impact of the pandemic is being felt by the firms we regulate. Ultimately, we can’t intervene to stop firms from failing in the face of economic distress and sadly we do expect a significant number of regulated firms, particularly smaller firms, to fail in the months ahead.”