The UK’s first Covid-19 lockdown threatened the viability of around 4,000 financial firms, the Financial Conduct Authority (FCA) said this morning.
The financial watchdog surveyed 23,000 smaller financial firms to greater understand the financial impacts of Covid-19 and found that 59 per cent of firms expected blows to their profits due to the pandemic.
Others’ liquidity took a serious hit.
If these firms were to fail, the FCA said around 1,000 of them have the potential to cause financial damage to clients, investors or customers.
At-risk firms lacked financial resilience during the first lockdown, although the FCA said that did not mean they wouldn’t survive if conditions improve.
However, the survey results were before the latest nationwide lockdown announced this week.
Executive Director of Consumers and Competition Sheldon Mills said, “We are in an unprecedented – and rapidly evolving – situation. A market downturn driven by the pandemic risks significant numbers of firms failing.”
Mills added, “By getting early visibility of potential financial distress in firms we can intervene faster so that risks are managed and consumers are adequately protected.”
The survey results show that between pre-lockdown and June, firms across the sectors experienced significant change in their total amount of liquidity.
This was defined as cash, committed facilities and other high-quality liquid assets.
Three types of financial service companies saw an increase in liquidity: Retail investments (eight per cent), retail lending (eight per cent) and wholesale financial markets (83 per cent).
The other three sectors saw a decrease in available liquidity: insurance intermediaries and brokers (30 per cent), payments and e-money (11 per cent) and investment management (two per cent).
Pinch of salt
However, Angela Greenough, a financial services Partner with law firm CMS said the survey results are not as shocking as they may seem.
“The fact that we have not seen large scale failures after ten months of disruption is hopefully testament to how those [capital and liquidity buffer] rules have operated as they are intended to”.
“That said, the FCA may be anticipating failures…the important things from FCA’s perspective now are client money: is it being properly segregated and safeguarded; do the firms have orderly wind down plans and can something be done to increase liquidity and capital?”