In March 2014, the Financial Conduct Authority (FCA) set out its approach to supervising the conduct of the firms it regulates. In his introduction to the document ‘Our approach to supervision’, FCA director of supervision Clive Adamson stresses that no new approaches have been adopted recently, but that the document brings together various information the FCA has previously released on how it supervises firms.
All firms are allocated to one of four categories: C1, C2, C3 and C4. C4 firms are deemed to present the lowest risk, and most of the smaller financial advisory firms will fall into this category. Indeed, only 11 firms are classed as C1, around 120 as C2 and 400 as C3, while the C4 category contains some 25,000 firms. These numbers exclude the 50,000 or so consumer credit firms who will become regulated by the FCA in just a few days’ time on April 1.
An FCA assessment of a firm covers areas such as:
- Business model and strategy
- Front line business processes
- Systems and controls
The FCA has set out three ‘pillars’ of the way it conducts its supervision activities:
- Proactive firm supervision – its regular programme of supervision
- Event-driven, reactive supervision – what happens once issues of concern have been identified. If the additional supervision of a firm carried out at this stage confirms the FCA’s concerns, enforcement action may follow.
- Issues and products supervision – supervising business sectors to identify areas of concern. An example of this form of supervision is the FCA’s regular thematic reviews, where information is collected on a selection of firms to assess their conduct standards surrounding one specific issue. Examples of recent thematic reviews have included: implementation of the Retail Distribution Review, incentive schemes and payment protection insurance complaint handling
Regarding the first pillar, C4 firms can expect to have an assessment by the FCA every four years. This may not necessarily involve the FCA visiting the firm to conduct a comprehensive audit of its affairs, and instead the FCA may decide to request information online or by telephone. Nevertheless, firms need to be aware that receiving an FCA visit is always a possibility, and that at all times they need to adopt the approach of : “If the FCA walked in here today, would they like what they see?’
Smaller firms must not assume that once the FCA has conducted its assessment, there will be no supervision conducted for another four years, however. For example, they may be contacted again as part of the ‘issues and products’ supervision, or information in a data return may lead the FCA to suspect that the firm poses an increased risk.
All firms should take note of thematic reviews relating to their business sector. Even if you are not one of the firms assessed, the FCA expects you to read its final report on the review, to take note of the findings and to consider whether any changes need to be made within the firm.