Prudential Regulation

The adequacy of a firm’s financial resources needs to be assessed in relation to all the activities of the firm and the risks to which they give rise, and so the rules apply to a firm in relation to the whole of its business. A firm must at all times maintain overall financial resources, including capital resources and liquidity resources, which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due.

Adequate financial resources and adequate systems and controls are necessary for the effective management of prudential risks. Senior Management Arrangements, Systems and Controls (SYSC) set out general rules and guidance on the establishment and maintenance of systems and controls.

Principle 4 requires a firm to maintain adequate financial resources. The FCA (and PRA where applicable) is concerned with the adequacy of the financial resources that a firm needs to hold in order to be able to meet its liabilities as they fall due. These resources may include both capital and liquidity resources, as set out in the various prudential source books.

The FCA and PRA Handbooks set out provisions that deal specifically with the adequacy of that part of a firm’s financial resources that consists of capital resources. The adequacy of a firm’s capital resources needs to be assessed both by that firm and the appropriate regulator. Through their rules, the FCA/PRA set minimum capital resources requirements for firms. They also review a firm’s own assessment of its capital needs, and the processes and systems by which that assessment is made, in order to see if the minimum capital resources requirements are appropriate. The FCA/PRA may impose a higher capital requirement than the minimum requirement as part of the firm’s Part 4A permission where this is deemed appropriate by them.

A firm should have systems in place to enable it to be certain whether it has adequate capital resources to comply with the requirements at all times. This can be tested via a risk identification and management process, and stress and scenario testing of its risk assessments. Consistent with its approach in other areas, the FCA/PRA require the process to be documented. These tests should be performed, at a minimum, annually, but FCA/PRA guidance suggests that they should be performed more regularly should a significant change in future expectations occur suddenly. This does not necessarily mean that a Firm needs to measure the precise amount of its capital resources on a daily basis. A firm should, however, be able to demonstrate the adequacy of its capital resources at any particular time if asked to do so by their regulator.