FSA Business Plan 2012/13

The FSA Business Plan, which closely followed the publication of the FSA Risk Outlook (see separate article in this Regulatory Roundup), advises that the FSA’s supervision function moved to a ‘twin peaks’ structure on 2 April 2012.

This is in keeping with the FSA handing over responsibility for prudential regulation (for banks etc) to the Prudential Regulation Authority (PRA) and conduct regulation to the Financial Conduct Authority (FCA) – see past Regulatory Roundups e.g. issue 31 for further details. The FSA’s Conduct Business Unit is headed by Martin Wheatley, CEO designate of the FCA, whilst the Prudential Business Unit (PBU) is headed by Hector Sants, described as CEO designate of the PRA. However, as will be known, Mr Sants is leaving the Regulator at the end of June 2012 with his role as head of the PBU being assumed by the current deputy head Andrew Bailey. There is no official date for the FSA ‘split’ save for ‘early in 2013’.

As a reminder, the PRA will operate as part of the Bank of England and will focus on the prudential supervision of banks etc. as well as significant investment firms. It is estimated that a total of 2,200 firms will fall under the PRA, and, interestingly, approximately 1,100 staff will be transferred to the Bank.The FCA will have a dual role in that it will be responsible for the prudential supervision of those firms not falling under the PRA (approximately 24,500 firms) as well as the conduct regulation of all firms, including those prudentially supervised by the PRA.

On the supervision front, the FSA will stop using the existing ARROW approach. Instead, following the set up of the two business units on 2 April, the two supervisory units will run their own – separate – risk-mitigation programmes. As such some firms will have two separate sets of mitigating actions to address. Firms that were due to complete an ARROW assessment before spring 2013 (when it is assumed that the FCA/PRA will come into being) will still get a visit (or two) but it will not be an ‘ARROW’ visit. Instead it will be a supervisory review consisting of two supervisory teams assessing the risks against their new objectives. We are told that the two supervisory groups may ask similar questions but the purpose will be different.

Small firms are not forgotten. Section 5 of the paper tells us that the rollout of the revised supervisory approach will continue and will include (apart from thematic project work) a four-year rolling assessment programme. The latter will incorporate workshops; face-to-face and paper-based/online reviews and follow-up work consisting of both verification and supervision visits.For those not subject to a face-to-face review, an online review tool is being developedwhich is expected to go live in the second half of this year.

We are reminded of the behavioural change in supervisory process from ‘old style reactive approach’ to the ‘new style proactive approach’ which will be reflected in a willingness to intervene earlier using a judgement based approach. The Regulator will continue to take tough enforcement action where necessary to deliver credible deterrence. Firms are asked to recognise that this new approach will require greater resources and thus cost more (elsewhere the paper acknowledges that the average increase in FSA fees for the last five years has been around 13%).

Apart from the expected areas of market abuse, financial crime, RDR etc. there are two areas that firms may wish to bear in mind.

The FSA will continue to focus on client money and assets (see article on the CASS resolution pack in this Regulatory Roundup) and we are promised that 2012/13 will see a further strengthening of the intensive regulatory and supervisory approach.

One other area that will receive special FSA attention in 2012/13 (the paper uses the ‘credible deterrence’ expression) is transaction reporting (see separate article in this Regulatory Roundup). The Regulator believes that ‘compliance remains patchy’ despite several enforcement cases for breaches of transaction reporting requirements.