The Financial Conduct Authority has found a large number of financial services businesses in the UK are close to failure due to the covid-19 pandemic
In a survey sent to 23,000 solo-regulated firms, the FCA discovered that “a market downturn driven by the pandemic risks significant numbers of firms failing”, said Sheldon Mills, executive director of consumers and competition.
According to Mills, the UK watchdog identified 4,000 companies that present low financial resilience creating a “heightened risk of failure”. But they might be able to recover if economic conditions improve, he added.
Of the 4,000 companies, around 30% have the “potential to cause harm” if they were to close down.
Mills added: “Our role isn’t to prevent firms failing. 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.”
Lack of a ‘proactive plan’
Keith Richards, chief executive of the Personal Finance Society, said the FCA’s findings are “concerning”.
“I am surprised that there is no indication of a proactive plan to help mitigate possible failures during these unprecedented times,” he added. “It is important to protect the interests of the consumers who may also be impacted as well as avoid further financial pressure being placed on the rest of the sector.
“From our own research, we acknowledge and appreciate how well firms have done to weather successive storms of lockdowns, health and economic impacts and obviously the additional effect of people’s personal lives as well. The work our members have done in this period to maintain and even go beyond what they normally offer clients is a testament to importance and value of the role the profession plays in society.
“This survey was of course done before furlough was extended, which now gives employers financial support until the end of April and this time it can be taken flexibly. Firms can now furlough for as little as one day a week, for example, and this flexibility and guaranteed support could help firms bounce back in a phased way over the coming weeks.
“At the time, this survey was undertaken there were no vaccines in sight and the announcement of new vaccines has seen markets injected with a little optimism. The flip side to that, however, is that it also took place before the third lockdown, which could cause greater damage, despite us feeling so close to an exit from measures to slow the spread of coronavirus which is why we need regulators to join with government in support the resilience of the sector.”
Liquidity woes
Additional results from the regulator’s survey revealed that companies experienced “significant change” in their liquidity levels during the first lockdown – March to June 2020.
The FCA defined liquidity as cash, committed facilities and high-quality liquid assets.
Retail investments was one of the sectors that saw an increase in liquidity (8%) between February and June 2020, alongside retail lending (8%) and wholesale financial markets (83%).
Whereas the insurance intermediary sector experienced the biggest decrease (30%) in available liquidity, followed by the payments and e-money sector (11%), and investment management (2%).
The majority of firms surveyed (59%) said they expected coronavirus to negatively affect their net income, with 72% believing the impact to be between 1% and 25%, while 3% of companies expected it to be more than 76% for the quarter following the study.
The FCA said it will repeat the study as the developments related to the extension of the furlough scheme, current rules and restrictions, as well as the discoveries of several vaccines and implementation of vaccination strategies were not present during the last one.
