Supervision under the FCA

Clive Adamson, Director of Supervision, Conduct of Business, gave a speech at the annual FSA Asset Management Conference on the supervisory approach that will be adopted by the FCA. Although aimed at the asset management sector, elements of the speech will be of relevance to all firms.

The audience was reminded of the FCA’s single strategic objective – to protect and enhance confidence in the UK financial system – which will be delivered through three operational objectives, including competition, or the lack of it (see Regulatory Roundup 31 for further details including its six regulatory principles).

The FCA will move away from a primarily reactive style to being a forward-looking regulator, including making judgements about firms’ business models, product strategies and how boards run their business.

Firms will be categorised into four new FCA supervision categories – C1, C2, C3 or C4 – depending upon impact on consumers and the market. The metrics have not yet been finalised but C1 firms are likely to be the largest with C4 firms being smaller with simpler business models; firms should expect a letter in early 2013 to let them know which category they will be in.

Most firms will also be prudentially regulated by the FCA. Here, firms will be categorised under three categories – CP1, CP2 or CP3. The latter will include those firms whose failure is unlikely to have significant impact and will be supervised on a reactive gone-concern basis.

It is expected that some firms will move to longer having a dedicated supervisor, but with more supervisors ready to be deployed to deal with problems as they arise.

Day to day supervision of firms will be based upon three key pillars: Firm Systematic Framework (FSF) (based on an analysis of business models and strategies and an assessment embedded culture); Event Driven; Issues (e.g. whistleblowing allegations); and Issues & Products (driven by sector analysis). C1 and C2 firms can expect two-year regulatory cycles, with C3 and C4 firms having their business models evaluated over a four-year cycle.

The intention is not to make an artificial distinction between wholesale and retail markets in recognition that activities in both markets are connected and that poor conduct risks can transmit between them. Although wholesale firms will also be subject to the three supervisory pillars described above, it is likely that there will be additional wholesale-specific modules for a limited number of C1 and C2 firms.