Briefing: FCA reveals anxiety over firms’ financial resilience, but is its heart in the right place?

By Katie Scott, Associate Editor

Last week, the FCA published its findings from the financial resilience survey it doled out to 23,000 financial services firms between June and August last year.

Designed to measure the potential financial implications and fallout of the coronavirus pandemic on businesses, 19,000 companies responded to the FCA’s information request; however the results show that insurance intermediaries and brokers have not fared well financially.

The FCA found that insurance intermediaries and brokers are among the lowest proportion of profitable financial services firms, with these businesses seeing a 30% decrease in available liquidity during the Covid-19 pandemic.

Furthermore, the sector also heavily grasped at available government support - 44% of brokers and intermediaries furloughed staff last year, while 19% received a loan.

Speaking to Branko Bjelobaba, principal at general insurance FCA compliance consultancy Branko, on Wednesday, he described the data as “stark” and said that it is “not a rosy picture”.

One of the things that struck me most about the survey findings, however, was actually the FCA’s reaction.

As far as the regulator is concerned, the fact that a vast number of brokers are struggling to survive in the current financial climate is not the main issue – the FCA instead wants to ensure that if these firms do fail, they do so properly.

Upon publication of the survey results, Sheldon Mills, executive director of consumers and competition at the FCA, said: “Our role isn’t to prevent firms failing. But where they do, we work to ensure this happens in an orderly way.”

This attitude is something that was also picked up by Michael Sicsic, managing director at Sicsic Advisory.

He said: ”The FCA’s job is not to stop firms failing, but to ensure that if they do, it happens with careful planning and preparation to minimise harm to customers.

”It seems inevitable that we will see broker failures this year. Across the 23,000 financial services firms surveyed (including 3,370 insurance brokers and intermediaries), an estimated 20% have low financial resilience and are at heightened risk of failure. Of those, approximately 30% have the potential to cause harm in case of failure.

”The FCA has raised its expectations for how firms are monitoring their risks and wants to see a rapid MI ‘early warning’ system to indicate which thresholds have been breached or are close to breach.”

Although the regulator may worry about how insurance brokers and intermediaries go out of business, surely the focus should instead be on making sure these companies remain operational? If a large number of firms fail, that will only lead to less choice and diversity in the marketplace, never mind the individual impact on employees, their job security and career options.

This is a point also raised by the Chartered Insurance Institute’s (CII) chief membership officer Keith Richards, who said he is concerned by the regulator’s lack of a “proactive plan” to mitigate the possible business failures ahead.

Granted, keeping brokers in business may not exactly fall under the FCA’s remit as a regulator. But, bearing in mind the completely unprecedented situation we find ourselves in following the onset of the pandemic, if there is any time to show flexibility and understanding, it’s now.

Having uncovered the deplorable state of financial resilience in the sector, instead of just using the figures to prepare for a hefty to-do list as brokers close down, the FCA has an opportunity to work with the sector to improve financial stability.

Having already done so much for policyholders over BI claims, the FCA now needs to show the same care and focus to financial services firms that are treading water frantically to keep afloat. Helping the sector to remain financially buoyant is surely a good thing for all concerned.