This page shows the results from our financial resilience surveys that were sent to 23,000 regulated firms. Through the surveys we are understanding the real-time effect the pandemic is having on the finances of the firms we prudentially regulate. This will help us identify emerging risks of harm to consumers, the market and competition within it, and enable us to better mitigate those risks.
- Managing firm failure
- About the data
- Question 1: What is the total amount of liquidity resources that you control or have unrestricted access to?
- Question 2: What are your estimated cash needs and expected cash inflows over the next 3 months?
- Question 3: Has your firm negotiated any extensions with creditors/delayed payments?
- Question 4: Have you had or are you expecting a decrease in net income because of the impact of coronavirus?
- Question 4a: If you answered ‘Yes’ to Question 4. What is the estimated percentage impact on net income?
- Question 5: What is your net profit OR loss in the given period?
- Question 6: What impact is coronavirus having on your business model?
- Question 8: What was your income in the last financial year?
- Question 9: Have you furloughed permanent employees?
- Question 10: Have you used the government support loan?
Managing firm failure
We regulate approximately 49,000 solo-regulated firms, for which we are the prudential regulator and resolution authority. In line with our statutory customer protection and market integrity objectives and our competition duty, the regulatory framework aims to mitigate harm while firms are a going concern, ahead of any firm failure. Where we are the resolution authority, the firms are not systemic and should be able to fail as orderly entrants and exits are part of a well-functioning market. However, disorderly failures can harm consumers, the effectiveness of markets, and overall confidence in the UK’s financial system. We seek to ensure that firms fail in an orderly way and minimise harm to consumers and disruption to markets where possible.
In 2019, around 340 solo-regulated firms were reported to have entered insolvency proceedings. Many of these firm failures were managed with little harm identified, while a small number required significant regulatory intervention to manage the resulting harm. Looking into 2021, according to the Bank of England’s November 2020 Monetary Policy Report, ‘The outlook remains unusually uncertain’. UK Gross Domestic Product (GDP) is projected to fall in 2020 Q4, before growth resumes in 2021 as the impact of the pandemic is expected to decline. According to the report ‘in the MPC’s [Monetary Policy Committees] central projection, GDP does not exceed its level in 2019 Q4 until 2022 Q1’.
Examining our survey responses in the context of the Bank of England’s macroeconomic scenarios over the next year, we expect that failures due to the current economic downturn are likely to disproportionately impact some sectors and types of business models, creating potentially significant harm to consumers. This could reduce effective competition, and/or damage the overall effectiveness and reputation of the market in which the firms operate.
Working to achieve more orderly outcomes from failure
We aim to give consumers clear information about what action to take if a firm fails, including accessing the Financial Services Compensation Scheme (FSCS) where relevant. Firm failures can be disruptive to consumers and it is unlikely that harm can be completely eliminated. Our supervisory work is focused on those firms we assess have both the greatest risk and potential impact of failure.
This includes ensuring, where relevant:
- Firms are properly maintaining client assets or segregated monies to ensure they are safeguarded for consumers.
- Firms have sufficient funds and plans in place to wind down in an orderly manner.
- If possible, firms increase capital or liquidity to better withstand the economic stresses.
This supervisory work is a significant undertaking across a large population of firms.
Monitoring firms’ financial resilience
In response to the crisis, we are monitoring the effects of the economic downturn on firms’ solvency through 4 main sources:
- existing regulatory reported data
- enhanced data purchased from a third-party provider
- in-depth analysis of liquidity for a number of the most significant firms
- our financial resilience survey (published on this page)
Through these four sources we have rapidly increased our data on the firms we regulate. We have used this to provide more granular monitoring across the majority of the 49,000 firms we prudentially regulate to give an early warning about weaknesses in firms’ financial resilience.
Alongside assessments of financial resilience, we have also considered which types of firms could potentially cause the greatest economic harm in failure. We have prioritised consumer harm through loss of client assets or segregated funds, failure to pay redress claims/Ombudsman awards and lack of FSCS cover. We are also considering the potential loss of access to services for particularly vulnerable consumers and threats to competition and the effective functioning of markets.
From our analysis, a coronavirus-driven market downturn may cause significant numbers of firms to fail over the next 12 months. These are unprecedented times in terms of economic impact and levels of government support and the situation is rapidly evolving – caution should be taken about using this data to make predictions. In addition, this survey was conducted before recent developments which will have an impact on the market such as the extension of the government’s furlough scheme, the positive vaccine developments and the announcement of new rules and restrictions.
About the data
Scope of the survey
As set out above, the survey is only one source of data used to monitor the 49,000 firms we prudentially regulate. Phase 1 of the survey was sent to 23,000 firms in 2 tranches. 13,000 firms received the survey between 4 and 8 June and a further 10,000 firms received the survey between 5 and 10 August. Both surveys included the same questions. All firms surveyed are prudentially regulated by us (solo-regulated firms). Dual-regulated firms such as retail banks, building societies, credit unions, life insurers and general insurers were not within the scope of the survey as they are prudentially regulated by the Prudential Regulation Authority (PRA). In addition, there were firms who were within scope but were excluded from the survey, including debt advice firms that provide advice only and do not hold client money, Credit Brokers (of which there are around 24,000 firms) that present low harm in failure and firms where we are already regularly collecting more detailed financial information than we asked for in the survey.
The survey was repeated for all 23,000 firms after a 3-month interval from this initial survey. It is likely that it will be repeated regularly so that we can understand how the impact of the pandemic on the financial services sector is developing over time.
Survey results
We have aggregated the survey results for each question by sector to ensure that no individual firm can be identified. We categorise firms into 7 sectors: General Insurance & Protection, Investment Management, Pensions & Retirement Income, Retail Banking, Retail Investments, Retail Lending and Wholesale Financial Markets.
As at 11 October 2020, we had received 17,115 responses to the June and August surveys. With the recent repeat of the survey across the same 23,000 firms we have now had a response from approximately 19,000 firms. We continue to take follow up action to improve the response rate and this remains an area of focus. Below is the number of respondents per sector for phase 1 along with a description of the types of firms included within each sector:
- Insurance Intermediaries & Brokers (3,370 respondents): covers insurance intermediaries, Lloyds and London Market intermediaries and price comparison websites with general insurers not included as they are dual regulated. The label has therefore been changed from ‘General Insurance & Protection’ to more accurately reflect the nature of the firms surveyed.
- Investment Management (2,036 respondents): sector covers asset management, benchmarks, alternatives, custody services and contracts for difference providers.
- Payments and E-Money (715 respondents): covers the payments and e-money firms within the retail banking sector with banks, building societies and credit unions not included as they are dual regulated. The label has therefore been changed from ‘Retail Banking’ to more accurately reflect the nature of the firms surveyed.
- Retail Investments (5,159 respondents): sector covers crowdfunders, advisers and intermediaries, self-invested personal pension operators, platforms and wealth managers.
- Retail Lending (4,976 respondents): sector covers non-bank lenders, mortgage third party administrators, mortgage intermediaries, credit reference agencies, debt purchasers, collectors and administrators, debt advice firms, motor finance providers, peer to peer lending platforms, high cost lenders and mainstream consumer credit lenders. Credit brokers were excluded from the survey due to their low harm in failure.
- Wholesale Financial Markets (853 respondents): covers exchanges, multilateral trading facilities, wholesale brokers, principal trading firms and other wholesale investment firms.
- Pensions & Retirement Income: covers life third party administrators. As dual regulated insurers are excluded, the remaining number of solo-regulated firms in this sector responding to the survey is small and risks identification. We have therefore excluded the responses from this sector from the publication.
The survey results show the numbers and sentiment as reported to us by firms. We undertake our own objective financial resilience assessments of firms.
Points to note when reviewing the survey results
We asked firms 10 questions covering their financial position. We have presented the results of each of the questions below in the order they appeared in the survey. We have omitted question 7 (which asked for the volume of safeguarded or client money) as it was only addressed to a small subset of the firms we surveyed and does not directly relate to the financial resilience of the firms.
As set out above, the survey was issued across 2 periods in June and August. For questions 1 and 5 data is sought for 2 periods of time by way of comparison (before and during the impact of coronavirus). For firms surveyed in the first tranche, the 2 relevant periods are February and May. For those firms surveyed in the second tranche, the 2 periods are February and June. The May and June data is represented in the same legend as ‘latest’.
For questions 1, 2, 5 and 8, in addition to the sector view, we have also represented the results through the median firm per sector. This represents the firm in the middle of the range of results for the sector. While we consider that the median is a good representation of the ‘typical firm’ by sector, the distribution on either side of the median can vary significantly across sectors.
Chart tips: hover over data series to view the data values and filter the data categories by clicking on the legend.
Question 1: What is the total amount of liquidity resources that you control or have unrestricted access to?
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For this question, we defined liquidity as cash, committed facilities and other high-quality liquid assets (HQLA). We asked firms to provide us with their liquidity in February (pre-coronavirus) and May/June (during the impact of coronavirus). Across the sectors there was significant variance in the total amount of liquidity in February versus the later period. Three sectors saw an increase in liquidity between the 2 reporting periods: Retail Investments (8%), Retail Lending (8%) and Wholesale Financial Markets (83%), the latter seeing the greatest increase. The other 3 sectors saw a decrease in available liquidity: Insurance Intermediaries & Brokers (30%), Payments & E-Money (11%) and Investment Management (2%).
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Figure 2 shows when the median firm is viewed for each sector, we again see the variance across the sectors.
All sectors show an increase in available liquidity at the median firm, with the greatest increase in Retail Lending (56%) and the lowest in Investment Management (7%).
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We asked firms to provide us with their estimated cash inflows over the next 3 months and estimated cash needs (defined as including fixed costs and known variable costs) for the 3 months following the date of the survey. Across all sectors, total estimated cash inflows (aggregated for all firms) exceed estimated cash needs (aggregated for all firms). Figure 3 shows the sector with the greatest excess of inflows (for all firms) over cash needs (for all firms) is Wholesale Financial Markets (25%), followed by Investment Management (16%), Payments & E-Money (15%), Retail Investments (13%), Retail Lending (10%) and finally Insurance Intermediaries & Brokers (3%).
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The sector with the highest median expected cash inflows was Investment Management, followed by Wholesale Financial Markets, with Payments & E-money and Retail Lending reporting the lowest median expected cash inflows. The median cash needs were broadly in a similar order, with Investment Management and Wholesale Financial Markets showing the highest numbers and Retail Lending and Payments & E-money reporting the lowest median cash needs (as highlighted in Figure 4).
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Figure 5 shows that 13% of all respondents had negotiated extensions with creditors and/or delayed payments.
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Responses to this question varied significantly across the sectors. Figure 6 shows Retail Lending had the greatest proportion of firms (21%) who had negotiated an extension with creditors/delayed payments, as compared to Investment Management (6%) and Retail Investments (7%) which were the lowest. Take up by Payments & E-money was 19%, followed by Insurance Intermediaries & Brokers (14%) and Wholesale Financial Markets (11%).
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We asked firms whether they expected coronavirus to have a negative impact on their net income. 59% of firms told us that they did.
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Figure 8 shows Retail Lending and Retail Investments had the highest proportion of respondents expecting a negative impact on net income (67% and 66% respectively). This was closely followed by Insurance Intermediaries & Brokers (60%), Payments & E-Money (57%), Wholesale Financial Markets (35%) and finally the Investment Management sector (27%).
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The 59% of respondents that said they expected a negative impact on net income were asked to further identify the scale of the expected impact over the next 3 months (from the date of the survey). Figure 9 shows 72% expected the impact to be between 1% and 25%. 3% expected the impact to be 76%+.
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Figure 10 shows that Retail Investments had the fewest percentage of respondents who expected a 76%+ impact on net income (less than 1%) followed by Retail Lending (4%), Insurance Intermediaries & Brokers (4%), Investment Management (5%), Payments & E-Money (9%) and Wholesale Financial Markets (11%).
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In February (pre-coronavirus), 76% of firms said that they had recorded a profit; 22% of firms were unprofitable (ie reported £0 profit/loss or reported a loss). In the later reporting period (May/June, during coronavirus), 74% of firms had recorded a profit (a decrease of 2 percentage points) and 24% were unprofitable (an increase of 2 percentage points).
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The breakdown by sector shows the variance in profitable firms across the sectors. Figure 12 shows Payments has the lowest proportion of profitable firms, followed by Wholesale Financial Markets, Investment Management, Insurance Intermediaries & Brokers, Retail Lending and Retail Investments. For the firms that responded to this question the greatest decrease in profitable firms between February and May/June was seen in the Retail Lending sector (10 percentage points), followed by Payments & E-Money (9 percentage points). The other 4 sectors saw a small increase in profitable firms between February and May/June as follows: Insurance Intermediaries & Brokers (2 percentage points), Investment Management (2 percentage points), Wholesale Financial Markets (2 percentage points) and Retail Investments (1 percentage point).
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Figure 13 shows the median firm per sector by profitability across February and May/June. Here we see the sharpest change across the 2 periods is in the Payments & E-Money sector where profit reduces from £387 to £0 (100%), followed by Retail Lending where profit reduces by 44%. For all other sectors the median firm becomes more profitable, with the greatest increase in the Insurance Intermediaries & Brokers sector (37%) followed by Wholesale Financial Markets (30%), Investment Management (4%) and Retail Investments (1%).
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Figure 14 shows 49% of the firms surveyed reported that the impact of coronavirus would be neutral, with 46% reporting a negative impact. Less than 5% of firms reported a positive impact.
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Figure 15 shows, overall, the sector with the least negative outlook was Investment Management, with 73% of firms expecting a positive or neutral impact from coronavirus on their business model and 27% expecting a negative impact, followed by Wholesale Financial Markets where 64% were positive or neutral and 36% negative, Retail Investments where 58% were positive or neutral and 42% negative. For Payments & E-Money, the majority of firms had a negative outlook, with 46% of firms positive or neutral and 54% negative. The most negative outlook was in Retail Lending where 42% of firms were positive or neutral and 58% were negative.
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Figure 16 shows, in the last financial year, Retail Lending had the greatest total revenue, closely followed by Insurance Intermediaries & Brokers. The sector with the smallest aggregate income was Payments and E-money, followed by Retail Investments and Wholesale Financial Markets.
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Figure 17 shows the position significantly changes when looking at the median firm by sector. The median firm in Investment Management has a much higher income than all the other sectors while the median firm in Payments and E-Money has the smallest, followed by the median firm in Retail Lending.
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We asked firms if they have accessed support available from the Government through the staff furlough and loan schemes. 37% of respondents had furloughed permanent employees and 20% had received a government backed loan.
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Figure 19 shows the take-up of both schemes varied across the sectors. Proportionately, Retail Lending had made most use of the available government support (49% of Retail Lending firms had furloughed staff and 36% had received a government backed loan), followed by Insurance Intermediaries & Brokers (44% had furloughed staff and 19% had received a loan), Retail Investments (37% had furloughed staff and 15% had received a loan), Payments & E-Money (36% had furloughed staff and 11% had received a loan), Wholesale Financial Markets (16% had furloughed staff and 11% had received a loan) and finally Investment Management (8% had furloughed staff and 3% had received a loan).