The Financial Conduct Authority (FCA) has published the findings of its Covid-19 financial resilience surveys, revealing that 4000 firms are at risk of failure.
In response to the crisis, the FCA has monitored the effects of the economic downturn on firms’ solvency. To do this, the regulator has rapidly increased the data it collects on firms.
Around 19,000 firms responded to an FCA survey, which was used to assess the impact of Covid-19 on their financial resilience. In addition, the FCA has been using 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.
Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said: ‘We are in an unprecedented – and rapidly evolving – situation. This survey is one of the ways we are continuing to monitor the potential impact of coronavirus on firms. A market downturn driven by the pandemic risks significant numbers of firms failing.”
The results show that between February and May/June 2020, firms across the sector 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 2 reporting periods: Retail Investments (8%), Retail Lending (8%) and Wholesale Financial Markets (83%). The other three sectors saw a decrease in available liquidity: Insurance Intermediaries & Brokers (30%), Payments & E-Money (11%) and Investment Management (2%).
Mills added: “At end of October we’ve identified there are 4,000 financial services firms with low financial resilience and at heightened risk of failure, though many will be able to bolster their resilience as and when economic conditions improve. These are predominantly small and medium sized firms and approximately 30% have the potential to cause harm in failure.
“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.”
When partaking in the survey, 59% of respondents said that they expected Covid-19 to have a negative impact on their net income.
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.
The FCA has warned that as its survey is one of the four ways the regulator is monitoring firms, caution should be taken about using the data to make predictions.