FCA Covid-19 resilience tests show 4000 firms at risk of failure


The UK’s Financial Conduct Authority has identified four thousand regulated firms at low financial resilience and at heightened risk of failure as a result of the economic downturn caused by the coronavirus pandemic.

As many as 19,000 solo regulated firms responded to an FCA survey designed to assess the impact of Covid-19 on their financial resilience. The watchdog also used existing regulatory reporting data, enhanced data purchased from a third-party provider and in-depth analysis of liquidity for a number of the most significant firms in determing solvency.

Of the four thousand firms identified as a at risk, Sheldon Mills, executive director of consumers and competition says: “These are predominantly small and medium sized firms and approximately 30% have the potential to cause harm in failure.

The survey results show that between February (pre-lockdown) and May/June (during the impact of the first lockdown), firms across the sectors experienced significant change in their total amount of liquidity. This was defined as cash, committed facilities and other high-quality liquid assets.

Three sectors saw an increase in liquidity between the two reporting periods: Retail Investments (8%), Retail Lending (8%) and Wholesale Financial Markets (83%), the latter seeing the greatest increase. The other 3 sectors saw a decrease in available liquidity: Insurance Intermediaries & Brokers (30%), Payments & E-Money (11%) and Investment Management (2%).

When asked whether they expected coronavirus to have a negative impact on their net income, 59% of respondents had said that they did. Of these, 72% expected the impact to be between 1% and 25%. Three percent expected the impact to be 76%+ within the next 3 months of the survey being taken.

The Payments & E-money sector has the lowest proportion of profitable firms, followed by Wholesale Financial Markets, Investment Management, Insurance Intermediaries & Brokers, Retail Lending and Retail Investments. For the firms that responded to this question the greatest decrease in profitable firms between February and May/June was seen in the Retail Lending sector (10 percentage points) followed by Payments & E-Money (9 percentage points).

Proportionately, Retail Lending had made most use of the available government support (49% of Retail Lending firms had furloughed staff and 36% had received a government backed loan), followed by Insurance Intermediaries & Brokers (44% had furloughed staff and 19% had received a loan), Retail Investments (37% had furloughed staff and 15% had received a loan), Payments & E-Money (36% had furloughed staff and 11% had received a loan), Wholesale Financial Markets (16% had furloughed staff and 11% had received a loan) and finally Investment Management (8% had furloughed staff and 3% had received a loan).

“Our role isn’t to prevent firms failing,” says Mills. “But where they do, we work to ensure this happens in an orderly way. By getting early visibility of potential financial distress in firms we can intervene faster so that risks are managed and consumers are adequately protected.”

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