The UK's Financial Conduct Authority asked 23,000 regulated firms to take part in financial resilience surveys. It has now published the results. Through the surveys it believes that it has gauged the effect that the pandemic is having on the finances of the firms that it regulates prudentially.
The FCA regulates smaller-to-medium-sized financial firms in the UK, leaving the largest to be regulated by the Prudential Regulation Authority at the Bank of England.
The management of failure
In 2019, around 340 firms regulated solely by the FCA went into receivership. The liquidators managed their failures in such a way as to cause “little harm” (the FCA does not say to whom), although a small number required heavy regulatory intervention to offset that harm. Looking into 2021, the Bank of England’s Monetary Policy Report in November, entitled The outlook remains unusually uncertain, said that the UK's Gross Domestic Product (GDP) would not equal the fourth quarter of 2019's figure until the first quarter of 2022.
The FCA has been monitoring the effects of the economic downturn on firms’ solvency through four main sources:
- existing “regulatory reported” data;
- “enhanced” (an unexplained term) data purchased from an unnamed commercial provider of data;
- in-depth analysis of liquidity at some of the most significant firms; and
- its financial resilience survey, freshly published.
The analysis suggests that "a coronavirus-driven market downturn may cause significant numbers of firms to fail over the next 12 months."
The FCA conducted its survey before various recent developments such as the extension of the government’s furlough scheme, the emergence of vaccines and new rules and restrictions. 13,000 firms received the survey between 4 and 8 June and a further 10,000 firms received the survey between 5 and 10 August. The survey was repeated for all 23,000 firms after a 3-month interval. The FCA expects to repeat it regularly.
One sector of the survey was retail investments, with 5,159 respondents such as crowdfunders, advisers and intermediaries, self-invested personal pension (SIPP) operators, platforms and wealth managers.
Three sectors saw an increase in liquidity between the 2 reporting periods: retail investments (8%), retail lending (8%) and wholesale financial markets (83%), the last of these seeing the greatest increase.
In all sectors, total estimated cash inflows (aggregated for all firms) exceed estimated cash needs (aggregated for all firms). The sector with the greatest excess of inflows (for all firms) over cash needs (for all firms) is wholesale financial markets (25%), followed by investment management (16%), payments and e-money (15%), retail investments (13%), retail lending (10%) and insurance brokers and intermediaries (3%).
The sector with the highest median expected cash inflows was investment management, followed by wholesale financial markets, with payments and e-money and retail lending reporting the lowest median expected cash inflows. The median cash needs were broadly in a similar order, with investment management and wholesale financial markets showing the highest numbers and retail lending and payments reporting the lowest median needs for cash.
The FCA asked firms the question: "Has your firm negotiated any extensions with creditors/delayed payments?" The data shows that 13% of all respondents had negotiated extensions with creditors and/or delayed payments. Retail lending had the greatest proportion of firms (21%) that had done so, while investment management (6%) and retail investments (7%) had done so the least.
Another question asked: "Have you had or are you expecting a decrease in net income because of the impact of the Coronavirus?" 59% of firms answered in the affirmative, with retail lending and retail investments expecting to suffer the worst (67% and 66% respectively). Other figures were in the same region if slightly lower, but the investment management sector was more optimistic with a relatively low 27%.
In February (before the virus, to all intents and purposes), 76% of firms said that they had recorded a profit; 22% of firms were unprofitable (i.e. they reported £0 profit/loss or reported a loss). In the later reporting period (May/June, during the Coronavirus), 74% of firms had recorded a profit (a decrease of 2 percentage points) and 24% were unprofitable (an increase of 2 percentage points).
The payment sector possesses the lowest proportion of profitable firms, followed by wholesale financial markets, investment management, insurance intermediaries, retail lending and retail investments.
Meanwhile, 49% of the firms in the survey reported that the effect of coronavirus would be neutral, with 46% reporting a bad effect. Fewer than 5% of firms reported a good effect. The sector with the least negative outlook was investment management. In retail investments, 58% of reports were positive or neutral and 42% negative.
In the last financial year, retail lending had the greatest total revenue, followed closely by insurance intermediaries. The sector with the smallest aggregate income was payments, followed by retail investments and wholesale financial markets.
The situation changes significantly when one looks at the median firm by sector. The median firm in investment management has a much higher income than all the other sectors, while the median firm in payments has the smallest, followed by the median firm in retail lending.
Furlough at firms
The FCA asked firms whether they had availed themselves of Government support through the staff furlough and loan schemes. 37% of respondents had furloughed permanent employees and 20% had received government-backed loans. The take-up of both schemes varied across the sectors. Proportionately, retail lending had made most use of the available government support (49% of such firms had furloughed staff and 36% had received Government-backed loans), followed by insurance intermediaries (44% had furloughed staff and 19% had received a loan), retail investments (37% had furloughed staff and 15% had received a loan), various others and, at the bottom, investment management (8% had furloughed staff and 3% had received a loan).
4,000 firms at risk in October
At the end of October the FCA's survey spotted 4,000 financial firms with "low financial resilience and at heightened risk of failure," though it expects the prospects of many to brighten this year as the economy bounces back from the abyss of 2020. The troubled firms are predominantly small and medium-sized. About 30% of them, in the FCA's vague phrase, "have the potential to cause harm in failure."