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January 7, 2021

FCA Financial Resilience Survey: retail investment segment boasts greatest profits

By Hannah Wright

Over four-in-five (85.6%) of wealth management firms, financial advisors and other retail investment firms steered clear of the red during the pandemic.

This is according to data from the Financial Conduct Authority (FCA) that has revealed thousands of financial companies, including wealth management, on the brink of collapse after the COVID-19 pandemic.

Insights from the FCA revealed that by November 2020, 4,000 of the firms surveyed had low financial resilience and faced a greater risk of failure. Despite these figures, the data remained largely positive for the retail investments category, which had one of the highest numbers of profitable firms.

Sheldon Mills, Executive Director of Consumers and Competition commented: “At end of October 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.”

Mills continued: “These are predominantly small and medium sized firms and approximately 30% have the potential to cause harm in failure.”

In response to the pandemic, the FCA has been monitoring the effects of the economic slowdown on firms’ solvency through rapid collection of data. Two surveys were sent out to 23,000 firms split by a 3-month interval, from February to June.

Explaining the significance of the survey, Mills commented: “We are in an unprecedented – and rapidly evolving – situation. This survey is one of the ways we are continuing to monitor the potential impact of coronavirus on firms. A market downturn driven by the pandemic risks significant numbers of firms failing.”

Safety in numbers

According to the data, retail investments saw an 8% increase in liquidity between the two surveys, from median firm liquidity of £91,670 ($124,418) to £107,108. Concerning estimated cash needs and expected cash flows, retail investments registered a 13% excess, with estimated inflows representing £2.7bn and outflows of £2.4bn.

The retail investment segment was largely profitable across both surveys, with the proportion of profitable firms increasing from 85.6% to 86.7%. The segment also represented one of the most positive, with 58% of respondents disagreeing that COVID had a negative impact on business model.

However, of the 59% of firms anticipating a negative impact on their net income, retail investments had the highest proportion of respondents expecting net income losses of 66%. Regarding government support, 37% of retail investment firms furloughed staff and 15% received a government-backed loan.

In addition to survey data, the FCA has been using existing regulatory reporting data enhanced data purchased from a third-party provider and in-depth analysis of liquidity for several of the most significant firms.

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