In March 2023, the FCA summarised its findings and set out its expectations of fast-growing FCA solo-regulated firms, reflecting a multi-firm review it had carried out in 2021/22 of 25 firms that had experienced fast growth over a three-year period from 2018 to 2020. The FCA assessed the impact of this rapid growth on their financial and non-financial resources.
The review focused on risk management practices, governance arrangements, and adequacy of financial resources (capital and liquid assets) at a sample of CFD providers, wealth managers, and payment services firms.
The FCA observed that for most firms reviewed:
• Their risk management framework and governance arrangements (including staffing in second and third lines of defence) had not kept pace with the growth in their business activities. While risk management practices at these firms may have been proportionate at the authorisation stage, they had not evolved to scale with the business. This can result in an increased risk of poor outcomes for consumers.
Some firms had launched new products during the period, such as cryptoassets, copy trading or fractional shares, without due consideration of the associated risks. This could leave the firms and their clients vulnerable to risks that they may not have considered adequately.
Some firms reviewed had been given feedback previously about areas of concern; however, most of these firms had not addressed that FCA feedback adequately.
• Firms’ assessment of the adequacy of financial resources did not consider the growth in their underlying business, resulting in financial resources assessments that were not commensurate with the size, business model, and underlying risks. This can affect the financial resilience of firms, increasing the risk of disorderly firm failure.
Most firms did not perform adequate stress testing or scenario analysis and did not consider the impact of a material decrease in their rate of growth. Most firms did not perform a meaningful liquidity stress test.
A small number of firms did not calculate the formulaic regulatory requirements correctly.
Most firms did not understand their liquidity risks adequately.
• Wind-down plans were inadequate following the fast growth of these firms, increasing the risk of harm in the event of firm failure.
Most firms did not have clear wind-down triggers and had optimistic assessments of the time required to complete the wind-down. There was significant reliance on the income generated from divestments with inadequate consideration being given to the practical challenges involved.
Some of the 25 firms were included in the FCA’s Early and High Growth Oversight grouping1 for closer supervisory oversight, to address the FCA concerns identified and ensure growth takes place in a sustainable manner.
1 see: https://www.fca.org.uk/firms/authorisation/early-high-growth-oversight
Detailed feedback letters, which included recommended actions, were sent to all firms where compliance concerns were identified. The letters were supplemented with calls with firms to discuss the findings and recommended actions.
All firms that have grown rapidly, or have plans to do so, should read the FCA’s findings and consider whether they need to make changes to their own arrangements.
Thistle Initiatives has supported wealth management firms and payment services firms with compliance for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting you as and when, our team of specialists can serve as your right hand in a meeting and complying with regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.
Are you looking for help with your risk management and governance framework, financial resource assessments or wind-down planning, wealth management compliance or more general regulatory questions? Contact our specialist team now to schedule a free consultation. Get in touch with us by calling 0207 436 0630 or sending an email to info@thistleinitiatives.co.uk.