FCA Capital Adequacy Guidance for Solo Regulated Firms
The FCA issued a statement warning that firms must plan ahead and ensure sound management of their financial resources in the face of the threats from Coronavirus.
Whilst the FCA has indicated it wishes to see firms to continue to operate and that it intends to apply flexibility, the statement lacks clarity on exactly what it means by flexibility and how such flexibility will be applied.
The FCA has indicated that Government aid to firms can be part of a firm’s plans for survival. The three main measures for most financial services firms that are likely to provide financial support are VAT deferral, the 80% of pay for Furloughed Workers scheme and the Coronavirus Business Interruption Loan Scheme. However, under current rules, whilst loans and deferred payments will assist with cash flow, any bank loan or Coronavirus Business Interruption Loans Scheme loan, unless arranged as a subordinated loan, will normally be treated as a liability for capital adequacy purposes. FCA has not issued any guidance or clarification regarding whether it will provide any suspension of rules or another easement concerning this issue.
The FCA has stated that if a firm is concerned it will be unable to meet its capital requirements or its debts as they fall due, the firm should contact its FCA Supervisor with its plan for the immediate period ahead. The FCA also states that if a firm needs to exit the market, it should have a plan as to how this can be achieved in an orderly way, taking steps to reduce the harm to consumers and the markets.
The FCA has further indicated that firms that have been set capital buffers can continue to use them to support the continuation of that firm’s activities. Firms that are regulated for prudential purposes by the Prudential Regulation Authority (PRA) should be aware of the PRA’s guidance and requirements too. They must discuss any concerns with the PRA and keep the FCA advised of the same.