FCA Publishes Guidance on Assessing Adequate Financial Resources

The FCA has published finalised guidance on a framework to help financial services firms ensure they have adequate financial resources and to take effective steps to minimise harm.

The guidance sets out the regulator’s expectations of how firms determine they have adequate financial resources. It applies to all FCA solo-regulated firms subject to threshold conditions and/or the Principles for Businesses (PRIN). The framework document (which you can access in full here) aims to provide more clarity on:

  • the role of adequate financial resources in minimising harm
  • the practices firms can adopt when assessing adequate financial resources
  • how the FCA assesses the adequacy of a firm’s financial resources

Of course, the development of this guidance has crossed over with the ongoing Covid-19 (Coronavirus) pandemic. The FCA states that the guidance does not place specific additional requirements on firms because of Covid-19. However, clearly, the crisis has underlined the need for all firms to have adequate resources in place.

Having adequate financial resources:

  • allows firms to operate and provide services through the economic cycle
  • allows for an orderly wind-down without causing undue economic harm to consumers or to the integrity of the UK financial system

A lack of financial prudence could cause risk. The FCA is concerned that poor financial management might lead to poor conduct, such as prioritising short-term revenue generation over consumers’ interests, which could lead to a firm’s failure and result in serious harm to consumers and financial markets.

The FCA says that its “intention is to improve the way firms operate so they can take effective steps to prevent harm from occurring, by improving controls and/or reducing the risk in their activities and put things right when they go wrong.”

Professional Indemnity (PI) Insurance

As a result of Covid-19, brokers have reported facing some difficulties in securing PI insurance because of a number of factors such as fears of increased claims due to potentially incorrect advice, lack of Covid-19 cover in respect of business interruption policies and exclusions for Covid-19 related claims. It’s important to remember that minimum PII requirements are set by the FCA and the handbook sets out the minimum terms to be incorporated in the insurance. Firms could lose permissions and will be unable to trade if they do not have the necessary PI insurance in place which meets the minimum necessary requirements.

Section 3 of the FCA’s framework, ‘Identifying and assessing the risk of harm’, touches on this issue. Potential harm may occur when “insurance intermediaries [are] exposed to negligence claims which may not be covered by the firm’s professional indemnity insurance policy (e.g. where the intermediary places business with an insurer that becomes insolvent, and there is an exclusion in the PII policy for Covid-19) potentially causing losses to customers and a disorderly wind-down of the intermediary.”

The FCA states that it expects firms to identify all significant harms related to the activities they undertake.

If you have any concerns regarding the above, please get in touch with your RWA Business Manager. You can also contact the RWA team via the helpdesk on 01604 709509 or helpdesk@rwagroup.co.uk.

About the author

Steve has over 15 years of experience in retail general insurance, including influential roles at Hallmarque Assistance Ltd, Endsleigh and more recently as Compliance Director for Premium Choice Ltd, a large independent insurance broker.

Steve is Head of Compliance at RWA and is responsible for the day to day needs of some of RWA’s larger clients nationwide, often working with RWA’s senior team on larger more complex projects such as those involving remedial works, auditing of standards, developing compliance frameworks and providing project assurance, particularly when subject to FCA scrutiny.

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