The FCA probes struggling firms once more

Darren Sinden

In answering the October survey almost 60% of respondents said that they expected the pandemic to hurt their business and reduce income

The FCA has sent out a questionnaire or survey to regulated firms to probes their business models and performance during the COVID 19 lockdowns.

This is the third such survey from the regulator in the last 7 months, the other two having been sent in June and September 2020 respectively.

The latest request for information from the FCA asks respondents how COVID has affected their business model.

If firms respond with a neutral or positive reply they can simply move on to other questions.

However, if they answer negatively then they face a very frank inquiry which asks if the firm expects to remain in business or will be forced to exit the market, due to the current macro environment.

The form goes on to effectively ask those respondents how long they estimate they can remain in operation for.

Just one week ago the FCA suggested that 4,000 firms out of a sample of 23,000 regulated business were in danger of going under during the next 12 months. A potential default rate of just over 17.0%.

The business areas that had seen the biggest contractions were insurance intermediaries and brokers, payments and electronic money firms, and investment managers.

All three groups had seen drops in cash and assets during the pandemic, the type of reserves that could otherwise have acted as a buffer during an economic downturn.

Sheldon Mills executive director in charge of consumers and competition at the FCA said at the time that: “A market downturn driven by the pandemic risks significant numbers of firms failing”

He added that “At the end of October (2020), 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”

In answering the October survey almost 60% of respondents said that they expected the pandemic to hurt their business and reduce income. 700 firms said that they estimated that their income would fall by more than two-thirds due to the coronavirus and the associated economic slowdown.

The fact the FCA has decided it’s necessary to recanvass financial services firms suggests that the regulator perceives genuine problems ahead particularly at small and medium-sized businesses.

The FX and margin trading brokerage communities are thought to have enjoyed a very fruitful 2020. As retail traders took advantage of being at home to boost both their trading volumes, and the profitability at many businesses.

Listed firms such as IG Group and CMC Markets reported record turnover and bumper profits during 2020.

However, rivals Plus500 showed what can happen if you oppose your clients, or incorrectly hedge your market exposure during periods of excess volumes and activity. The firm admitted that it had taken $125.0 million hit from profitable CFD trading clients last year.

Plus500 was able to absorb that loss thanks to its overall 2020 revenues of $997.0 million.

However not every broker will have been so fortunate and the temptation to simply B-book customer trades may have been too much to resist. The meteoric rise in the price of Bitcoin seen since November could easily have compounded these issues.

Whatever the truth of the matter if we do see significant numbers of regulated financial services firms shutting up shop in the next six months. Then that is highly likely to drive up the fees and levies that surviving firms will have to pay towards the financial services compensation scheme. Which will, in turn, squeeze profit margins even further at some businesses.

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