Fast-growing firms (FGFs) multi-firm review

The Financial Conduct Authority, FCA, has published a press statement to inform of the findings from a recent review of so-called Fast-growing firms (FGFs) which includes contract for differences (CFD) providers, wealth managers, and payment services firms. The review was conducted among 25 firms in 2021 and 2022 and focused on the assessment of „financial and non-financial resources“ in view of the enormous growth these firms. It was based on documentation furnished by affected companies, such as business plans, wind-down plans, internal capital adequacy assessment process (ICAAP) documents, and others. The goal of the review was to ensure that the risk management processes of these firms have kept up with the pace of their growth. Therefore, the FCA particularly looked into governance arrangements, risk management policies and procedures, the capital and liquid asset positions of the firms, and their business models.
The key findings are briefly noted below; for more detailed information, please refer to the FCA statement:
- Most firms belonging to larger groups did not adequately consider inter-group dependencies and the risk of outsourcing arrangements in their risk management framework. Additionally, firms belonging to large groups seem to rely on the capital funding of their parents.
- Some firms were / are simply not aware of all regulatory requirements applying to them: some were lacking wind-down plans, some capital and liquidity assessment plans, some set up such plans, but failed to regularly review them to ensure they remain effective.
- Some firms did not assign sufficient resources to risk management, particularly in view of their rapid growth.
- Most firms performed poorly in assessing their own capital adequacy. Many simply relied upon minimum capital thresholds without taking into consideration their own business size and scope.
- Most firms „did not perform adequate stress testing or scenario analysis and did not consider the impact of a material decrease in the rate of growth“. Liquidity stress testing was also performed poorly, often failing to take into account the key drivers for liquidity and the application of such towards high growth rates.
- Most firms had poor wind-down plans with an insufficient analysis or even knowledge of wind-down triggers and insufficient consideration of intra-group dependencies.
To conclude, the FCA briefly outlines its expectations in this context which include
– the maintenance and evolvement of adequate risk management policies commensurate with a firm’s business size and scope;
– the update of the risk management framework at upper levels (governance) to reflect a firm’s risk appetite and the allocation of sufficient and adequate resources;
– the performance of regular capital adequacy and liquidity assessments in line with the FCA’s Guidance on assessing adequate financial resources (FG20/1); and
– the performance of regular stress testing and the drawing of adequate wind-down plans that are regularly re-assessed to ensure the ability of an orderly wind-down, if so needed.