In April, the Financial Conduct Authority (FCA) wrote a Dear CEO letter to motor finance firms to remind them that they must ensure they are maintaining adequate financial resources. The assessment of adequate financial resources is critical and forms part of the FCAs threshold conditions. Having adequate financial resources reduces the risk of market disruption, increases the chance that firms can ‘put things right’ when they go wrong and allows firms to minimise consumer harm.
This letter comes following observations undertaken by the FCA as part of their review on discretionary commissions. Although the Dear CEO letter has been sent to motor finance firms, a reminder to have adequate financial resources in place is a good reminder for all firms operating within the finance services sector.
Every authorised firm must meet the FCAs threshold conditions and Principles for Business. As per COND 2.4, firms are required to have appropriate resources both financial and non-financial appropriate to the level of regulated activity that they undertake. This means that financial services firms should have the correct level of financial and human capital resources to allow them to correctly undertake their regulatory obligations, which includes covering any potential customer redress.
An assessment of adequate capital resources is based on how much capital is needed, compared to how much capital is available. The FCA expects firms to have an amount of capital equal to or preferably higher than its assessment of what is necessary. The assessment should include the type and quality of capital and its ability to be used in a wind-down situation to ensure harm to consumers is mitigated. All firms should assess the risks inherent to the business and any potential harms that could be caused, as well as explain how they would close their business, and the assessment should be proportionate to the nature, scale and complexity of the firm and its activities.
PPL can help by identifying key improvements, including complaints monitoring and management, financial promotions sign off, reviewing how your firm assesses suitability and affordability and ensuring that you are gathering the correct level of MI to allow you to identify key risk areas, trends and undertake any root cause analysis.
If you wish to discuss any concerns, or how PPL may be able to help, then please get in touch.