Around 4,000 UK financial services firms could fail due to the COVID-19 pandemic, the regulator has warned

• Up to 4,000 financial services firms in the UK are at risk of failing due to the coronavirus pandemic, the Financial Conduct Authority warned on Thursday.
• Insurance services groups, payments firms and investment managers reported a fall in liquidity.
• However, the watchdog said stronger markets and a return to economic growth would support UK financial services firms.

Around 4,000 UK financial services firms are at "heightened risk of failure" due to the impact of the coronavirus pandemic, around a third of which could "cause harm" if they go under, according to a survey released on Thursday by the country's financial watchdog.

Almost 60 per cent of roughly 19,000 respondents to the Financial Conduct Authority's (FCA) survey said they expected the pandemic to hit their net income, despite financial markets recovering strongly since last spring.

Of these firms, 72% expected the hit to be between 1% and 25%. But 3% - roughly 340 - expected the impact to be more than three-quarters of their net income.

"We are in an unprecedented - and rapidly evolving - situation," Sheldon Mills, executive director of consumers and competition at the FCA, said.

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He said that at the end of October the FCA had identified "4,000 financial services firms with low financial resilience and at heightened risk of failure".

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

However, Mills stressed that "many will be able to bolster their resilience as and when economic conditions improve".

Markets surged in the autumn and early winter when various high-profile vaccine trials yielded positive results and approvals and rollout began.

The UK's FTSE 100 has risen almost 7% in 2021 so far, highlighting investors' belief that the economy will grow sharply this year.

Yet there are risks to this view. They include the new, more infectious strain of coronavirus in the UK that has driven sharply rising cases and new lockdowns.

The FCA survey highlighted the stress UK financial services firms went through in the spring of 2020. It said insurance intermediaries and brokers saw available liquidity drop 30%. Payments and e-money firms and investment management companies suffered 11% and 2% falls, respectively.

The watchdog's survey did not include the 1,500 largest firms in the UK financial sector, which are regulated by the Bank of England.

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Payments and e-money had the lowest proportion of profitable firms as a sector, the FCA said. That was followed by wholesale financial markets, investment management, insurance intermediaries and brokers, retail lending, and retail investments.

Retail lending has lent on government support the most. Almost 50% of retail lenders furloughed staff and 36% got a government-backed loan.

Among insurance intermediaries and brokers 44% had furloughed staff and 19% had received a loan. Investment management received the least state aid.

"A market downturn driven by the pandemic risks significant numbers of firms failing," Sheldon said.

"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."