The Financial Conduct Authority (FCA) has updated its expectations on financial resilience for FCA solo-regulated firms, to provide flexibility and allow them to continue operating during the COVID-19 crisis.
As firms prudentially-regulated by the FCA play an important role in supporting the economy, the FCA has voiced its expectation that they plan ahead and ensure the sound management of their financial resources.
This means taking appropriate steps to conserve capital, and to plan for how to meet potential demands on liquidity.
Firms that have been set capital and liquidity buffers can use them to support the continuation of their activities; if a firm is planning to draw down a buffer, it should contact the FCA or its named FCA supervisor.
If a firm needs to exit the market, the FCA has stated that this should be done in an orderly way, while taking steps to reduce the harm to consumers and the markets.
Firms should also maintain an up-to-date wind-down plan that takes into consideration the current impact of coronavirus on the market.
The update outlined that government schemes to help during this period could be part of a solo-regulated firm’s plans for meeting debts as they fall due.
If a firm is concerned it will not meet its capital requirements, debts, or if its wind-don plan has identified material execution risks, it should contact the FCA or its supervisor with its plan for the immediate period.
When considering whether to make a discretionary distribution of capital to fund a share buy-back or dividend, upstream cash, or meet a variable remuneration decision, the FCA expects that firms and their boards will satisfy themselves that each distribution is prudent under current market circumstances, as well as consistent with their risk appetite.
Firms will not be expected to distribute capital that could credibly be required to absorb losses over the coming period.
Non-bank lenders subject to IFRS9 were reminded by the FCA that the standard requires that forward-looking information used in expected credit loss estimates is reasonable and supportable.
The standard should be implemented in a consistent way that reflects both the impact of coronavirus and the support provided by government and central banks.