Coronavirus: FCA investigates financial and operational resilience

News of the survey comes as the FCA’s director of supervision for investment, wholesale and specialists, Megan Butler, focused on operational and financial resilience in a speech last week at a virtual conference held by the Personal Investment Management & Financial Advice Association.

Butler said many firms had adjusted quickly to a new way of working as the pandemic hit, but needed to maintain their focus on operational resilience as circumstances change and government guidance is updated.

Butler said coronavirus was causing “significant downward pressure on many firms’ revenues” and this would also mean significant downward pressure on investment management fee incomes. In turn, she said, financial pressures could harm customers if firms cut corners on governance or their systems and controls – for example, increasing the likelihood of financial crime, poor record keeping, market abuse and unsuitable advice and investment decisions.

Financial services regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law, said: “Covid-19 is testing firms’ contingency plans in real-time and almost certainly beyond anything that might have been considered in worst case scenario testing.

“The fact that firms have responded so well in this crisis indicates that the foundations of operational resilience and its building blocks have generally been strong and adaptable. However the acute crisis is settling to a new normal and what is acceptable as crisis management may not have the longevity required for this next stage. Therefore firms need to assess how best to continue now that the dial has moved,” Budd said.

Budd said the financial resilience survey would help the FCA make plans for the way it would regulate in the coming months.

“Another aspect of firms’ resilience in the face of the pandemic and beyond is its impact on firms’ financial resilience. The FCA’s recently announced survey is a clear indication of the regulator’s wish to have a clear and current picture of the impact the pandemic is having on firms’ finances. It needs to understand and prepare for the pandemic’s longer-term effect on the sector financially, and potentially also the need for orderly winding down of firms made financially vulnerable by the pandemic,” Budd said.

“Often we find that firms apply rules, especially those regarding anti-money laundering procedures, more strictly than the rules and guidance themselves. Whilst this is clearly understandable in order to reduce risk, nonetheless it would be worthwhile going back to the source and seeing how much flexibility actually exists and whether it can be incorporated into processes,” Budd said.

In her speech Butler said the FCA expected firms to continue to act with integrity, and expected wealth management firms to still provide suitable advice and discretionary investment decisions and consider the best interest of their clients “at all times”.

Although Butler’s speech and the FCA’s survey come in the context of the Covid-19 outbreak, they continue work begun by the FCA and other regulators last year on the topic of operational resilience. In a joint consultation published in December 2019 the FCA, Prudential Regulation Authority and Bank of England set out proposals for financial services firms to be obliged to quantify the maximum level of disruption they will be able to tolerate to core services.

Butler said coronavirus made these proposals “more relevant than ever”.