UK regulator says 4,000 financial firms at risk of failure due to Covid-19
"We are in an unprecedented – and rapidly evolving – situation". This warning is launched by Sheldon Mills, Executive Director of Consumers and Competition at the FCA as the regulator had surveyed 23,000 solo-regulated firms to understand the real-time effect of the pandemic on the financials of the firms. A market downturn driven by the pandemic risks significant numbers of firms failing, said Sheldon Mills.
“At end of October we have 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,” said Mills, adding that the regulator’s role is not 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,” he added.
More than half of the firms (59%) expected the Covid-19 to have a negative impact on their net income, with 72% expecting the impact to be between 1% and 25%. The lowest proportion of profitable firms were in the payments and e-money sector, followed by wholesale financial markets, investment management, insurance intermediaries and brokers, retail lending and retail investments.
The survey revealed that between February(pre-lockdown) and May/June (during the impact of the first lockdown), firms across sectors experienced significant changes in their total liquidity, covering cash, committed facilities and other high-quality liquid assets. Three sectors recorded an increase in liquidity: Wholesale financial markets (83%), retail investments (8%) and retail lending (8%). The sectors that saw a decrease in available liquidity are insurance intermediaries and brokers (30%), payments and e-money (11%) and investment management (2%).
The greatest decrease in profitable firms between February and May/June was seen in the retail lending sector (10 percentage points), and payments and e-money (9 percentage points). The other sectors which recorded a small increase in profitable firms during this period were insurance intermediaries and brokers (2 percentage points), investment management (2 percentage points), wholesale financial markets (2 percentage points) and retail investments (1 percentage point).
Retail lending made the most use of the available government support, with 49% of these firms furloughing staff and 36% receiving a government-backed loan. This was followed by insurance intermediaries and brokers (44% had furloughed staff; 19% availed loan) and retail investments (37% had furloughed staff; 11% received a loan).
The FCA plans to repeat the survey as the situation evolves and cautioned about this data being used to make predictions. The regulator underlined that the survey was conducted before the extension of the government’s furlough scheme, the positive vaccine developments and the announcement of new rules and restrictions.
However, such a study was not carried out on the 1,500 largest companies in the British financial sector, which are regulated by the Prudential Regulation Authority.