The FCA has published a policy statement (‘Tackling serious failings in firms’) on how it will address serious failings of standards, governance and culture in firms. Although reference is made to the Parliamentary Commission on Banking Standards on its front cover, both its introduction and the accompanying press release make it clear that the statement applies to all regulated firms.
Section C of the statement is a useful reminder of the FCA’s supervisory model (see also Regulatory Roundup 50), including where necessary a ‘deep dive assessment’ in that the Regulator will be looking at:
- frontline business processes;
- systems and controls;
- culture;
- governance; and
- business model
Section D outlines the new Enhanced Approach that has been developed for use where the FCA perceive a serious risk to their objectives arising from a failure of culture, governance or standards and where the FCA do not think that its ‘usual’ supervisory approach will be sufficient. Situations that could lead to Enhanced Supervision include (and we are told that the FCA will use ‘judgement’ rather than a formal process) :
poor management or under-resourced of Risk, Compliance or Internal Audit;
- lack of challenge at Board level;
- weakness in the way that the Board and senior management influence culture;
- repeated conduct failings (even if each individual failing might not be considered serious);
- failings in several business area;
- evidence of weak risk management
Enhanced Supervision will include the FCA setting a deadline for a firm to return to ‘normal supervision’ with regular monitoring of progress. It is expected that the firm’s Board will have to make a formal commitment to remediation measures, with the possibility of oversight by an independent person being required using s166 powers (see below). Should the FCA not feel confident about the Board’s commitment other tools could be used including an OIREQ (Own Initiative Requirement). Enhanced Supervision may lead to an Enforcement investigation – but equally a firm may find itself on the receiving end of such an investigation without having been placed in Enhanced Supervision.
The Annex to the statement sets out the tools and powers available to the FCA. It is interesting to note that since last April, when the FCA came into being, the Regulator has commissioned 166 Skilled Persons reviews in connection with culture and governance at 22 firms – four of these were commissioned directly by the FCA.
