FSA recently carried out a piece of thematic research aimed at testing and validating the accuracy of financial data submitted by firms supervised by the Small Firms & Contacts Division. Over 7000 firms were subjected to detailed testing of their financial returns. The most “weak” or “at risk” firms identified were visited as well as a small control sample of firms. This resulted in over 60 firms being visited.

What FSA found at those firms selected for a visit:

• Only one in three firms had submitted accurate data.
• One in three Directors were assessed as having a poor understanding of financial reporting or an over-reliance on external consultants.
• Where FSA assessed firms as having misreported, either in error or to mislead, half of these were subsequently found to have undeclared financial resources deficits and are currently subject to further supervisory action by FSA.

This work was in response to a public commitment FSA made to verify data submitted as part of integrated regulatory reporting and to mitigate the risk that firms do not submit accurate, up-to-date financial information in a rapidly changing economic environment.

The main FSA messages being promulgated are:

Misreporting in any form is unacceptable

Those firms found to have been submitting to mislead FSA are currently subject to further action. Even where the misreporting is in error, FSA have required firms to explain, evidence their true position and warned about their future conduct.

Supervisory action

FSA are cancelling the permissions of three firms as a direct result of this intervention and expect a further 30 firms to have risk alerts raised against them. FSA will take further action against those firms which have submitted misleading information.

Testing and validation process

FSA subject firms’ submitted data to a series of financial tests designed to identify deteriorating financial situations and potentially weak and “at risk” business models. They supplement this with cross-referencing against statutory account filings at Companies House, as well as other data sources available to them, including that from product providers.

This supplementary testing is in addition to the business–as-usual checks and FSA intend to extend this to all authorised small firms. The analysis includes reviews of the recoverability and liquidity of intra-group and external debtors, creditors, provision for tax and other liabilities, and significant post-balance sheet events which were likely to have a substantive negative impact on capital. FSA have identified a targeted population of firms for further investigation.

Quality of capital and maintaining financial resources

The targeted visits caused FSA serious concerns that some firms view the capital adequacy test as only being measured when submitting the regular returns FSA require. FSA want to stress that firms are required to maintain sufficient capital of sufficient quality to meet the capital requirements on a permanent basis and, equally important, be able to demonstrate the same if requested. Firms’ understanding of FSA regulatory requirements regarding prudential requirements and accounting standards in general was unacceptably lower than FSA expect.

CEI Compliance has already assisted a number of client firms with support  to help eliminate misunderstandings and unintentional mistakes.

If this is an area you would like assistance with, or indeed if you have any queries on this subject please contact us