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The FCA’s expectations on financial resilience

Planning ahead and ensuring the sound management of your financial resources is the clear message from the FCA. 

In these unprecedented and testing times, and as you deal with the many new challenges relating to business continuity and office management; it is essential that your firm ensures that it continues to meet its regulatory capital requirements, especially given the FCA’s announcement to firms regarding COVID-19.

“Adequacy of financial resources is designed to:

  • enable firms to remain financially viable and to provide services through the economic cycle
  • enable an orderly wind-down without causing undue economic harm to consumers or to the integrity of the UK financial system “

Ref: FCA’s CP19/20 – Assessing Adequate Financial Resources

Adequacy of financial resources, capital and liquidity is monitored through the regulatory returns submitted to the FCA on a periodic basis. The Pillar 1 capital calculations are based on the firms’ financials. In addition to this, the FCA expects firms to conduct, at very least on an annual basis, an ‘internal capital adequacy assessment process’ and present its analysis and results within a document called the ‘ICAAP’. As part of this assessment, firms are required to provide additional capital for other risks that it faces, known as the Pillar 2 capital requirement.

The FCA has always insisted that an ICAAP should be a live and representative document expressing the actual risks faced by firms.

Overall, the FCA considers if a firm has:

  • Taken reasonable steps to identify and measure its risks
  • Appropriate systems and controls and human resources to measure risks prudently at all times
  • Accessed adequate capital to support the business, and that client money and custody assets are not placed at risk
  • Resources which are commensurate with the likely risks it faces.

"Firms should consider ‘what if’ scenarios and estimate the potential impact. This is to determine the amount and type of financial resources needed to put things right when they go wrong.”

Ref: FCA’s CP19/20 – Assessing Adequate Financial Resources

In theory, your ICAAP should discuss a scenario which is catastrophic at a performance and operational level. It is important to include a detailed discussion about a pandemic so disastrous to the business continuity of the firm and the actions that the firm have taken in the past few days. 

Meaningful and robust stress testing needs to be part of your ICAAP. An event like this can trigger not just a significant drop in revenues and assets, but may also test the operational resilience that firms should articulate within their ICAAPs. 

The FCA’s assessment of ICAAPs

Besides providing detailed information on a firm’s capital adequacy and liquidity assessment, the FCA’s assessment of ICAAPs looks for the following:

  • Whether a forward-looking approach to risks has been considered and how these develop through the economic cycle
  • Reflect the risks to which the firm is exposed and the amount of risk it poses
  • Apply appropriate proportionality to identified risks
  • Assess the risks at least annually, reflecting that the fact that the business environment is dynamic so the assessment of risk and harm should also be dynamic.

We can help you update your ICAAPs for relevant risk assessments, calculate your capital adequacy position based on revised projections, carry out detailed and realistic stress testing so that you are able to avoid any potential breaches and address any capital or liquidity issues well in advance of any shortfalls. 

More details can be found on the FCA website here

If you would like to discuss the above, please get in touch with your usual Buzzacott contact or complete the form below and we'll be in touch.

This article was last updated on 30 March 2020.

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