About 4,000 City firms are at a heightened risk of failure due to the Covid crisis, and nearly a third of those businesses could potentially harm consumers if they collapsed, the financial watchdog has warned.
A Financial Conduct Authority survey designed to gauge the financial resilience of nearly 23,000 regulated firms showed that the financial stresses caused by the first wave of the outbreak may cause “significant numbers of firms to fail over the next 12 months”, unless the UK economy starts to recover.
The regulator said insurance intermediaries and brokers, payments and electronic money firms, and investment management companies experienced the largest drop in cash and assets, which can act as a buffer during a downturn.
Sheldon Mills, the FCA’s executive director in charge of consumers and competition, said the situation was “unprecedented – and rapidly evolving”.
“A market downturn driven by the pandemic risks significant numbers of firms failing. At the 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 said.
“These are predominantly small and medium-sized firms and approximately 30% have the potential to cause harm in failure,” he added.
Nearly 60% of all firms surveyed said they expected the Covid crisis to hurt their income, with nearly 700 firms forecasting it would fall by more than two-thirds due to the pandemic.
The FCA explained that disorderly failures could hurt consumers, for example by reducing competition, as well as harming “the effectiveness of markets, and overall confidence in the UK’s financial system”.
The survey included insurance agents and brokers, the investment management sector, retail lenders, crowdfunders, debt collectors and high-cost loan providers, as well as wholesale financial market players like brokers and exchanges.
The number of firms facing failure is much higher than originally estimated. In September, Britain’s financial watchdog warned that hundreds of small and medium-sized firms could collapse due to the economic pressures sparked by the Covid pandemic.
However, the FCA cautioned that the survey results were collected before the approval and rollout of Covid vaccines, the extension of the government’s furlough scheme to 30 April, or fresh lockdown measures.
The latest survey excludes the UK’s 1,500 largest financial firms, which are monitored by the Bank of England’s Prudential Regulation Authority. But the FCA would still be under pressure to prove it did its best to protect investors affected by any company failures in light of the scathing reports into its handling of London Capital and Finance ahead of the firm’s collapse.
Last month, an independent inquiry found that the FCA failed to properly supervise the mini-bond provider, which wiped out the savings of thousands of people after it went under in 2019.