FCA Guidance on Framework to Assess Adequacy of Financial Resources
FCA published the final guidance on a framework that explains approach to the assessment of adequate financial resources, for all FCA solo-regulated firms subject to threshold conditions and/or the Principles for Businesses (PRIN). FCA also provides further guidance on the meaning of adequate financial resources. The guidance sets out the role of adequate financial resources in minimizing harm, the practices firms can adopt when assessing adequate financial resources, and how FCA assesses the adequacy of financial resources of a firm. Through CP19/20, FCA had consulted on the purpose of adequate financial resources and its expectations about the practices firms should adopt for the assessment of adequate financial resources. The consultation took place from June 13, 2019 to September 13, 2019. Annex 1 to the guidance contains the feedback statement on the consultation.
FCA expects a firm’s assessment to be proportionate to the nature, scale, and complexity of it’s activities. All firms should assess the risks inherent in their business model, examine the potential harm that can be caused, and explain how to close the business in an orderly way. The guidance mentions the expectations of FCA from firms to reduce the potential to cause harm. These are related to adequate capital resources, governance and culture, identification and assessment of the impact of harm, assessment of additional risks to the firm, viability and sustainability of the business model and strategy, and wind down planning. Firms are required to hold an appropriate level of capital and/or liquid resources to cover the potential harm. Capital includes elements of a firm’s equity and appropriate loss-absorbing debt liabilities that rank behind general creditors, such as share capital and retained earnings, and subordinated debt.
The FCA review and feedback regarding firms’ own assessment of adequate financial resources aims to:
- Ensure firms have robust systems and controls, governance, leadership, and a culture that reduces the risk of harm to consumers and markets
- Ensure the existence of a proportionate and consistent approach in the assessments of adequate financial resources
- Have firms hold adequate resources that reflect the harm they may cause to consumers or UK financial markets
- Reduce the likelihood that failure would impact consumers and the UK financial system
- Minimize harm in the event of the failure of a firm as exits the market, by having the firm hold adequate resources and implement effective wind-down arrangements
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Keywords: Europe, UK, Banking, Insurance, Securities, Regulatory Capital, Governance, Proportionality, Adequate Financial Resources, Wind-Down Planning
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