2.4.3 Risk-Based Approach

Question 1

Risk based approach

Answer 1

FCA assesses individual firms for the risk ach one presents to the regulators objectives. Seeks to ensure firms are considering consumers and market integrity throughout their operations nad services.

Question 2

The FCA’s work is divided into 3 pillars

Answer 2

Pillar 1) Proactive Firm Supervision

Pillar 2) Reactive Supervision

Pillar 3) Issues and Products Supervision

Question 3

Pillar 1) Proactive Firm Supervision

Answer 3

As assessment of whether firms have the interests of clients and the market at the heart of their business - only applicable to Fixed Portfolio Firms

Pillar 1 has 4 evaluation and supervision methods

1. BMSA - analysis of business models and strategies to understand risks to consumers and market integrity. Incicaros of heightened risk are:
   - fast growth
   - high levels of profitability
   - cross selling dependent strategies
   - products with unclear features / pricing
   - Products being sold into undesignatd markets for the purpose
   - inherent conflicts of interest
2. Proactive Engagement - Regular FCA engagement with firms to maintain understanding of their operations to identify emerging risks and take pre-emptive measures in response
   - Meeting with Key Individuals
   - Regular reviews of management information
   - Annual Stratagey Meetings
3. Deep Dive Assesments on:
   - Culture and governance
   - Product Design
   - Sales and transaction processes
   - Post-sales/services and transaction handling
4. Firm Evaluation - a summary of the FCA’s review based on previous evaluations. FCA judges and explains its view in regards to risks posed by a firm and causes. The FCA’s strategy and work programme for the firm’s next supervision cycle are aimed at addressing and mitigating those risks

Question 4

Pillar 2) Reactive Supervision

Answer 4

When aware of significant risks to consumers or markets (or damage caused) ensuring mitigation of risk and ifn deeded, using FCA’s formal powers to hold firms/individuals accountable. Reactive, event driven supervision applies to both fixed and flexible portfolio firms

Question 5

Pillar 3 - Issues and products supervision

Answer 5

Sectoral analysis of events and drivers of poor outcomes for consumers and markets. Form of proactively supervising flexible portfolio firms, as opposed to Pillar 1. Can take the form of thematic reviews or smaller work.

The FCA Conducts market supervision and adheres to, and asks firms to adhere to, the next 10 principles:

• Ensuring fair outcomes for consumers and markets
• Being forward-looking and pre-emotive
• Being focused on the big issues and causes of problems
• Taking a judgement based approach
• Ensuring firms act in the right spirit
• Examining business models and culture
• Emphasising individual accountability
• being robust when things go wrong
• Communicating openly
• having a joined-up approach

10 principles applicable to all firms. Fixed portfolio and flexible portfolio firms must evaluate the systems and controls they have in light of these principles, with adherence to the FCA’s strategic objectives