Around 19,000 firms responded to the FCA’s financial resilience surveys last year, designed to determine the financial impact of the coronavirus pandemic on the financial services sector

Insurance intermediaries and brokers are among the lowest proportion of profitable financial services firms, with these businesses seeing a 30% decrease in available liquidity during the Covid-19 pandemic, according to new figures from the FCA.

Last year, the FCA issued a coronavirus financial resilience survey to solo-regulated firms in order to ascertain the impact of the Covid-19 pandemic on firms’ financial resilience.

The survey was sent to a total of 23,000 financial services companies between June and August 2020, excluding the 1,500 largest firms in the financial sector that are regulated for financial stability by the Prudential Regulation Authority (PRA). Around 19,000 firms responded to the FCA as at 11 October 2020.

The findings from the survey, published today by the FCA, found that at the end of October last year, 4,000 financial services firms had low financial resilience and were at a heightened risk of failure – furthermore, 30% of these companies have the potential to cause harm in failure.

Between February and May/June, three financial services sectors saw a decrease in available liquidity, which is defined by the FCA as cash, committed facilities and other high-quality liquid assets.

This includes insurance intermediaries and brokers (30%), payments and e-money (11%) and investment management (2%).

Profitability slump

Insurance intermediaries and brokers also fell into the group of financial services sectors that has the lowest proportion of profitable firms, trumped only by the payments and e-money, wholesale financial markets and investment management sectors.

Despite this, intermediaries and brokers have noted a two percentage point increase in profitability between February and May/June.

The survey further found that insurance intermediaries and brokers is the second sector, following retail lending, that has made the most use of the available government support - 44% of these businesses had furloughed staff last year, while 19% had received a loan.

Speaking on the survey results, Sheldon Mills, executive director of consumers and competition at the FCA, said: ’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. 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.

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

“Our role isn’t to prevent firms failing. But where they do, we work to ensure this happens in an orderly way.

“By getting early visibility of potential financial distress in firms, we can intervene faster so that risks are managed and consumers are adequately protected.”

Alongside the survey, the FCA has also used existing regulatory reporting data, enhanced data purchased from a third-party provider and in-depth analysis of liquidity to inform its view on firms’ financial resilience.

Furthermore, the regulator plans to repeat the survey “as the situation evolves”.

‘No surprise’

Branko Bjelobaba, principal at general insurance FCA compliance consultancy Branko, told Insurance Times that the FCA’s findings come as “no surprise”, however he is “worried that brokers are in one of the lowest sectors for profitability”.

He explained: “It comes as no surprise to me to see the cash liquidity of brokers has fallen by 30%. Brokers are the barometer of society and business - if people and businesses are struggling, then they may decide that on the grounds of affordability, they will do without insurance or cut down on it and that means less business for brokers, hence their own finances will suffer.

“Brokers have also had to invest massively to accommodate working from home - from the purchase of laptops and ensuring internet connectivity and the robustness of these.

“I am worried that brokers are in one of the lowest sectors for profitability and, therefore, [it] comes as no surprise to me that the FCA keep talking about orderly wind down and have published guidance on this.

“Clients and insurers have an exposure here; unfortunately, when circumstances are that severe, client and insurer money may be misappropriated, hence why the FCA has major concerns - their ‘Dear CEO’ letters bear testament to this.

“When it comes to solvency, it is clear that with 44% of brokers surveyed having had to furlough staff (how have they been coping?) that this will add to overall financial concerns (will workloads have fallen that drastically?).

“Plus, 19% of them have sought loans - bear in mind these are loans and not grants and, therefore, have to be repaid - they do not assist firms with their solvency calculations.”

Lack of proactive measures

The Chartered Insurance Institute’s (CII) chief membership officer Keith Richards, however, is concerned by the regulator’s lack of a “proactive plan” to mitigate the possible business failures ahead.

He said: “It is concerning that the FCA has determined 4,000 firms across three key areas are deemed at risk. Also, I am surprised that there is no indication of a proactive plan to help mitigate possible failures during these unprecedented times. It is important to protect the interests of the consumers who may also be impacted as well as avoid further financial pressure being placed on the rest of the sector.

“We must appreciate how well firms have done to weather successive storms of lockdowns, health and economic impacts and obviously the additional effect of people’s personal lives as well. The work our members have done in this period to maintain and even go beyond what they normally offer customers, should be commended.”

Although the FCA acknowledged the timing of its survey does not account for recent developments surrounding the vaccine or the extended furlough programme, this is a point that Richards emphasised.

“This survey was done before furlough was extended, which now gives employers financial support until the end of April and this time it can be taken flexibly,” he added. “Firms can now furlough for as little as one day a week for example and this flexibility and guaranteed support could help firms bounce back better in coming weeks.

“At the time this survey was undertaken, there were no vaccines in sight. The announcement of new vaccines has seen markets injected with a little optimism.

“The flip side to that, however, is that it also took place before lockdown three, which could cause greater damage, despite us feeling so close to an exit from measures to slow the spread of coronavirus.”

Resourceful and resilient

Despite acknowledging that “no sector has been unaffected by the consequences of the virus” and that “the survey results confirm what we all knew”, Biba’s head of compliance and training David Sparkes highlighted to Insurance Times that “the insurance broking sector is a resourceful and resilient one and can adapt quickly, as illustrated by the move to homeworking for many”.

He continued: “At Biba, we have also seen evidence of brokers rising to the challenges of remote working to help customers with their insurance queries and claims, echoed in the FCA’s portfolio letter, which said: ‘…we have seen some excellent examples of [insurance brokers] going the extra mile to help customers who find themselves in difficulty.’

“Let us not forget that the coronavirus business loans had a lower rate of interest than a normal bank loan, so may have provided an attractive vehicle for a few finance-savvy brokers to inject a source working capital into their businesses.

“The vaccines bring real hope that the end is in sight and we can expect the wider economy to pick up relatively quickly.”