CP13/6 - CRD IV for Investment Firms - Financial Conduct Authority

FCA 2013/xx
failure, a firm can be exposed to substantial losses resulting from customers'
claims and legal actions. Although the FCA would expect an asset manager to
have in place adequate controls to mitigate that risk, it may also like to
consider the potential cost to it if customers claim that it has not adhered to
mandates. Past claims and compensation may provide a useful benchmark for
an asset manager to assess its sensitivity to future legal action. In assessing
the adequacy of its capital, an asset manager may therefore consider whether
it could absorb the highest operational loss it has suffered over the last three
to five years.
2.3.61 G In relation to the issues identified in IFPRU 2.3.60G , an asset manager
should consider, for example:
(1) the direct cost to it resulting from fraud or theft;
(2) the direct cost arising from customers' claims and legal action in the
future – an asset manager could consider the impact on its financial
position if a legal precedent were to encourage its customers to take
legal action against it for failing to advise correctly on a certain type
of product, the relevance of which is likely to depend on whether the
asset manager is acting on a discretionary basis or solely as advisor;
and
(3) where it has obtained professional indemnity insurance, the
deductibles and individual or aggregate limits on the sums insured.
2.3.62 G The FCA expects an asset manager to consider the impact of economic
factors on its ability to meet its liabilities as they fall due. Therefore, an asset
manager should develop scenarios which relate to its strategic and business
plan. An asset manager might consider:
(1) the effect of a market downturn that affects both transaction volumes
and the market values of assets in its funds – in assessing the impact
of such a scenario, an asset manager may consider the extent to which
it can remain profitable (for example, by rapidly scaling down its
activities and reducing its costs);
(2) the impact on current levels of capital if it plans to undertake a
significant restructuring; and
(3) the impact on current levels of capital if it plans to enter a new market
or launch a new product – it should assess the amount of capital it
needs to hold when operating for the first time in a market in which it
lacks expertise.
A securities firm
2.3.63 G (1) A securities firm may consider the impact of the following situations
on its capital levels when assessing its exposure to concentration risk:
(a)
the potential loss that could arise from large exposures to a
Page 47 of 197