20 April 2020
In response to the ongoing Covid-19 crisis, the UK Financial Conduct Authority (FCA) has published an updated statement on its expectations on financial resilience for FCA solo-regulated firms. In addition to expectations relating to capital and liquidity buffers, write-down plans and expected credit loss estimates, the FCA outlines their expectations with regard to distributions, including variable remuneration.
Key points relating to distributions
- The FCA expect firms to plan ahead and ensure the sound management of their financial resources, including taking appropriate steps to conserve capital and planning for how to meet potential demands on liquidity.
- If a firm is considering whether to make a discretionary distribution of capital to fund a share buy-back, fund a dividend, upstream cash or meet a variable remuneration decision, the FCA expects firms to satisfy themselves that each distribution is prudent given market circumstances, and is consistent with their risk appetite.
- The FCA would not expect firms to distribute capital that could credibly be required to absorb losses over the coming period and may contact specific firms in relation to this.
It is notable that the statement does not prevent distributions from being made. Instead, the FCA wants FCA solo-regulated firms to scrutinise any proposed discretionary distribution and be prepared to prove that any such distribution is prudent, is consistent with the firm’s risk appetite and does not involve the distribution of capital that could credibly be required to absorb losses over the coming period. This means that, provided firms can prove the above, variable remuneration arrangements may continue to operate.
The FCA’s statement and the focus on preserving capital by scrutinising discretionary distributions follows earlier similar statements from the European Banking Authority and the UK Prudential Regulation Authority. More detail on these statements can be found here.
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