Rapid Growth and Compliance: A Summary of the FCA's Multi-Firm Review

Introduction

The Financial Conduct Authority (FCA) recently conducted a multi-firm review of 25 fast-growing firms in the financial services sector, specifically focusing on contract for differences (CFD) providers, wealth managers, and payment services firms. The review aimed to assess the impact of rapid growth on these firms' financial and non-financial resources, risk management practices, governance arrangements, and adequacy of financial resources. In this blog post, we summarize the key findings and recommendations from the FCA's report.

Key Findings:

1. Most firms' risk management frameworks and governance arrangements had not evolved to keep pace with their rapid growth, resulting in increased risk of poor outcomes for consumers.
2. Firms' assessments of the adequacy of financial resources did not consider their growth, leading to assessments that were not commensurate with their size, business model, and underlying risks.
3. Wind-down plans were found to be inadequate for most firms, increasing the risk of harm in the event of firm failure.

Recommendations

The FCA has provided detailed feedback to the firms reviewed and recommended the following actions:

1. Update risk management and governance arrangements, including resourcing needs in risk, compliance, and audit functions, to ensure firms have adequate resources in place to identify, assess, manage, and monitor risks and potential harms.
2. Update assessments of the adequacy of financial resources and wind-down plans. For some firms, this resulted in an increase in the level of capital and liquid assets held, reducing the likelihood of disorderly wind-downs and potential harm to consumers and markets.

Expectations for Fast-Growing Firms

The FCA expects all fast-growing firms to:

1. Have robust plans to understand future growth and maintain sufficient resources to manage growth or unexpected stress.
2. Update their risk management framework and governance arrangements to ensure they remain proportionate and fit for purpose, including resourcing needs of risk, compliance, and audit functions.
3. Ensure the assessment of the adequacy of financial resources continues to be commensurate with the size, complexity, and forecast growth of the business, including regular stress testing and scenario analysis.
4. Embed a liquidity risk management framework, including liquidity risk policies, controls, contingency funding plans, and stress testing.
5. Ensure wind-down plans are robust, considering the FCA's wind-down planning guide and liquidity management for wind-down as outlined in TR22/1.

Conclusion

The FCA's multi-firm review highlights the importance of robust risk management, governance arrangements, and adequate financial resources for fast-growing firms. All regulated firms that have experienced rapid growth or plan to do so should review the FCA's findings and consider whether changes to their arrangements are necessary to ensure compliance and reduce the risk of harm to consumers and markets.

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