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Global | Publication | September 2015
On 18 September 2015, the FCA published two guides that set out its new approach to the supervision of firms. Previously, the FCA used four categories (C1 – C4) for its conduct classification of firms. This has now changed with firms being classified as either fixed portfolio or flexible portfolio. Whilst the majority of firms will be classified as flexible portfolio and supervised through a combination of market-based thematic work and programmes of communication, engagement and education, a small population will be classified as fixed portfolio and be allocated a named individual FCA supervisor and be proactively supervised.
Notwithstanding whether a firm is classified as flexible portfolio or fixed portfolio the FCA’s supervisory approach is built on ten principles:
Both guides contain some common messages from the FCA. These include:
Pillar 1 proactive supervision generally covers a 12 to 36 month cycle and will involve firm meetings, review of management information, an annual strategy meeting and other proactive firm work. Deep dive(s) assessments that look at how a firm’s business operates in practice may also be scheduled as part of the supervision strategy. In relation to business model and strategy analysis (BMSAs) the FCA will pay particular attention where it sees common indicators of heightened risk such as strategies that depend on cross-selling. For all fixed portfolio firms the FCA will conduct periodic analysis, normally across a peer group of firms sharing similar business models or activity. Peer group BMSAs for wholesale firms focuses primarily on business lines. Also, cross-border services and activities are as relevant to FCA assessments of wholesale firms as individual legal entities.
A firm evaluation (a summary of the FCA’s view of a firm or group based on all the information it has about it) is undertaken in a cycle ranging from 1 to 3 years depending on the scale of the firm/group’s activities and the FCA’s assessment of risk. Key messages from the firm evaluation are given in a letter to the board of directors. The FCA aims to discuss its view with the board and its senior management and will usually attend a board meeting. Interim reviews of the firm evaluation are carried out during the supervisory cycle.
Pillar 2 event-driven, reactive supervision is discussed below as is Pillar 3 issues and product supervision.
Pillar 1 proactive supervision does not apply to flexible portfolio firms.
Pillar 2 event-driven, reactive supervision has a pre-emptive focus, aiming to identify and prevent consumer detriment and threats to market integrity before they happen. Risks and problems can be discovered through a number of sources, including information from the firm as well as data analysis. The FCA’s focus is on addressing the most important issues that affect its objectives. It expects firms to fix the root causes of problems as well as the symptoms. It expects firms to have a comprehensive and credible plan of action to mitigate risks.
Pillar 3 issues and products supervision. The FCA’s work under this pillar is fundamental to its approach to identifying and mitigating risks across multiple firms or whole sectors. Through sector analysis the FCA identifies common emerging risks, new products and other issues that it examines through a range of activities including thematic reviews. The FCA’s findings from this work are communicated to the industry and firms are expected to consider and act as necessary on the findings.
Firms that are prudentially regulated by the FCA fall into four prudential categories: P1, P2, P3 and P4. Like the conduct categories, the prudential categories determine the intensity of the prudential supervision of the firm. The prudential classification is:
For P1 and P2 firms the FCA carries out a comprehensive capital and liquidity analysis and a risk management capability assessment.
The FCA Handbook sets out minimum financial resources requirements (FRR) for all firms and this is the starting point for any prudential supervisory review. The scope and nature of an FRR is:
The FCA does not usually carry out prudential assessments for P3 firms nor does it proactively review or challenge how these firms calculate and meet their FRR. P3 firms are monitored by the FCA in two ways. First, reactively using an alerts-based system that allows the FCA to identify and deal with firms that have breached their prudential requirements. Second, through targeted cross-firm work assessing whether firms in a peer group are meeting the FRR.
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