Pt 5. Responsibilities and Approach to Regulation - Supervision Flashcards
What is supervision?
A term regulators use to describe their day-to-day regulatory relationship with authorised firms.
The process of monitoring and regulating firms to make sure they are complying with regulatory requirements.
What is a risk-based approach?
This means firms are individually assessed for the risk they present to the FCA meeting its operational objectives.
- The greater the risk, the greater the supervision.
What does the regulator use to assess a firm’s potential impact on FCA objectives?
- Current impact measures
- Retail customer numbers
- Some measures of market impact to assess firms potential impact.
- FCA categorises firms as either ‘fixed portfolio’ or ‘flexible portfolio’ with forms representing firms posing the greatest risk.
What are the 3 pillars the FCA’s supervision is based on?
Pillar 1 - Proactive firm/group supervision (preventative work)
Pillar 2 - Event-driven reactive supervision (problem solving)
Pillar 3 - Thematic approach - issues and products supervision (product campaigns)
What portfolio of firms link to which pillar?
- Fixed portfolio firms - subject to all 3 pillars, and have a named supervisor.
- Flexible portfolio firms - subject to Pillars 2 and 3 only.
What is the FCA’s approach to supervision?
Focuses on what consumers actually experience from firms, including:
- A clear sector-based approach
- Use of forward-looking analysis to help determine risks
- A focus on intelligence and data
- Use of thematic reviews
- A focused programme of firm level assessments
What are the key principles related to the FCA’s approach to supervision?
- Forward-looking
- pre-empt/address poor conduct, associated harm does not materialise, or harm likely to materialised does not cause significant harm.
- Focus on strategy and business models
- identify emerging risks of harm
- strong understanding of firm’s business models to identify poor alignment between firms profit incentive and interests of consumers, and markets.
- Focus on culture and governance
- identify what drives behaviour within firm in relation to governance, assess effectiveness and not merely design.
- seek to address any drivers of behaviour, likely to cause harm.
- Focus on individual and firm accountability
- approve and hold account most senior individuals whose decisions and personal conduct have significant effect on conduct of firm.
- expect firms to take responsibility for certifying competence and integrity of employees with potential to cause significant harm.
- Proportionate and risk-based
- understanding UK financial system, and firms business models to target firms where misconduct would cause harm, and be significant.
- use intelligence to target engagement.
- Two-way communication
- engage directly with consumers/representatives to understand issues they face, targeting firms that may cause harm.
- engage on how they are responding to market-wide events, firm-specific events, and regulatory framework and adjust FCA opinions and approach.
- clear about good and poor practice they observe
- be transparent as possible about their work and priorities
- Co-ordinated
- work closely with supervision teams
- share intelligence with other regulatory bodies
- supervise global firms, and market, and work with regulators overseas
- Put right systematic harm that has occurred and stop it happening again
- sees systematic harm
- suspects serious misconduct, referring to its Enforcement Division for investigation
- seek to obtain redress for affected consumers
How does the FCA conduct their risk-based approach to supervising?
High impact - Require a more detailed assessment, and highly intensive level of contact.
Low impact - Needs less direct supervision and may be contacted as little as once every 3-4 years.
Why is the FCA a reactive and proactive regulator?
This is because it reacts to information it receives, but also carries out thematic reviews, and uses a forward-looking analysis to understand what is happening in a particular sector.
What does the FCA react to in what information it sees?
- Accounts and auditor statements
- Business volumes and sources of business
- Complaints statistics
What does the FCA react to in what information it sees?
- Accounts and auditor statements
- Business volumes and sources of business
- Complaints statistics
What areas will normally be checked by an FCA supervisor as part of the risk-assessment process?
- Business operations
- Personnel matters
- Customer matters
What is mystery shopping?
- Widely used in the financial services industry, by firms carrying out research on their competitors.
- Useful way to bridge the gap between their supervisory reports and the information it receives from consumers.
- Useful when the FCA needs to look at selling practices, especially if there is an issue that warrants close inspection.
