SUP 1A.3 The FCA's approach to supervision

Purpose

SUP 1A.3.1GRP

The FCA will adopt a pre-emptive approach which will be based on making forward-looking judgments about firms' business models, product strategy and how they run their businesses, to enable the FCA to identify and intervene earlier to prevent problems crystallising. The FCA's approach to supervising firms will contribute to its delivery against its objective to protect and enhance the integrity of the UK financial system (as set out in the Act). Where the FCA has responsibilities for prudential supervision, its focus will be on reducing the impact on customers and the integrity of the financial system of firms failing or being under financial strain. In addition, when consumer detriment does actually occur, the FCA will robustly seek redress for consumers. This approach will be delivered through a risk-based and proportionate supervisory approach.

SUP 1A.3.2GRP

[deleted]1

Supervisory principles

SUP 1A.3.2AG

1The following supervisory principles will guide the FCA’s supervisory work.

  1. (1)

    Forward-looking – the FCA will aim to pre-empt or address poor conduct so that risks do not arise and any associated harm does not materialise or if the harm is likely to materialise to ensure it does not cause significant harm to consumers or the UK financial system.

  2. (2)

    A focus on strategy and business models – the FCA will assess a firm’s business model to:

    1. (a)

      identify emerging risks of harm and to ensure that the FCA’s supervisory activity mitigates the risks identified; and

    2. (b)

      develop a strong understanding of a firm’s business model for the purposes of identifying whether there is poor alignment between a firm’s profit incentive and the interests of consumers and the relevant markets functioning well.

  3. (3)

    A focus on culture and governance – the FCA will:

    1. (a)

      look at what drives behaviour within a firm: for example, the firm’s purpose as it is understood by the firm’s employees, the attitude, behaviour, competence and compliance of the firm’s leadership, the firm’s approach to managing and rewarding people (e.g. staff competence and incentives), and the firm’s governance arrangements, controls and key processes (e.g. for whistleblowing or complaint handling);

    2. (b)

      in relation to governance, assess effectiveness, and not merely design. The FCA will focus on a firm’s conduct risk framework. For example, whether the firm has effective governance arrangements in place to identify the risk of harm to consumers or the UK financial system and whether the firm has a strategy in place to manage and mitigate those risks; and

    3. (c)

      seek to address any drivers of behaviour which are likely to cause harm.

  4. (4)

    A focus on individual as well as firm accountability – the FCA will:

    1. (a)

      approve and hold to account the most senior individuals whose decisions and personal conduct have a significant effect on the conduct of their firm; and

    2. (b)

      as part of the Senior Managers and Certification Regime, expect firms to take responsibility for certifying the competence and integrity of employees with the potential to cause significant harm.

  5. (5)

    Proportionate and risk-based – the FCA will:

    1. (a)

      use its understanding of the UK financial system and firms’ business models to target firms where misconduct would cause the most harm (especially to vulnerable consumers or important markets) and firms where misconduct is most likely to be significant; and

    2. (b)

      systematically use intelligence to target its engagement from a broad set of sources. This includes complaints data, whistleblowers, the FCA’s contact centre, regulatory returns, other regulators and competitor firms.

  6. (6)

    Two-way communication – the FCA will:

    1. (a)

      engage directly with consumers and their representatives to understand issues they face and target firms that may be causing harm;

    2. (b)

      engage with industry, firms and market participants to understand how they are responding to market-wide events, firms-specific events and the regulatory framework and to adjust the FCA’s opinions and approach where appropriate;

    3. (c)

      be clear with firms and individuals about good and poor practice that the FCA observes; and

    4. (d)

      be as transparent as possible about the FCA’s work and its priorities for the coming year.

  7. (7)

    Co-ordinated – the FCA will:

    1. (a)

      ensure its Supervision teams work closely with those in its Authorisations, Market Oversight, Policy, Competition and Enforcement functions to reach robust decisions and share information and provide consistent messages;

    2. (b)

      share intelligence with other regulatory bodies such as the Bank of England, Payment Systems Regulator, the Financial Ombudsman Service Limited and the Pensions Regulator; and

    3. (c)

      as a supervisor of global firms and global markets, work with regulators overseas to supervise these firms and markets on issues which are common across national borders.

  8. (8)

    Put right systematic harm that has occurred and stop it happening again – the FCA will:

    1. (a)

      where it sees systematic harm, move quickly to stop harm occurring. For example, through imposing an Own Initiative Requirement (OIREQ) on the firm and, where appropriate, ensuring that the firm addresses the drivers of culture and its business model and strategy to prevent a recurrence;

    2. (b)

      where it suspects serious misconduct, refer to its Enforcement Division for an enforcement investigation; and

    3. (c)

      seek to obtain redress for affected consumers. The FCA may, for example, seek to put this right by requiring a consumer redress scheme, engaging directly with the firm, or by working with other authorities such as the Financial Ombudsman Service Limited.

The scope of the supervision model for firms

SUP 1A.3.3GRP

The FCA supervision model applies to all firms, although the application of the model1 may vary from firm to firm. For all firms, whether supervised with a dedicated supervision team or supervised as part of a portfolio, the FCA will complete analysis and assessment and communicate to firms on a regular basis its programme of work, view on the main risks of harm and the steps it, the FCA, will require firms to take1.

SUP 1A.3.4GRP

The supervision model is based on three types of work1:

  1. (1)

    proactive – pre-emptive identification of harm through review and assessment of firms and portfolios: this includes business model analysis and reviewing the drivers of culture1;

  2. (2)

    reactive – dealing with issues that are emerging or have happened to prevent harm growing1; and

  3. (3)

    thematic – wider diagnostic or remedy work where there is actual or potential harm across a number of firms.1

SUP 1A.3.5GRP

In order to create incentives for firms to raise standards and to maximise the success of the FCA's supervisory arrangements, it is important that a firm understands the FCA's evaluation of its risk so that it can take appropriate action.

SUP 1A.3.6GRP
  1. (1)

    The FCA intends to communicate the outcomes of its supervisory work1 to each firm within an appropriate time frame. In the case of firms in which risks have been identified which could have a material bearing on the FCA meeting its statutory objectives, the FCA will also outline a remedial programme intended to address these.

  2. (2)

    The FCA considers that it would generally be inappropriate for a firm to disclose its FCA risk assessment to third parties, except to those who have a need or right to be aware of it, for example external auditors. FCA risk assessments are directed towards a specific purpose - namely illustration of the risks posed by a firm to the FCA's statutory objectives and to enable the FCA to allocate its resources accordingly. Using a risk assessment for any other purpose has the potential to be misleading. The FCA therefore discourages firms from disclosing their assessments, unless they are required to make them public under relevant disclosure obligations.

The nature of the FCA's relationship with firms

SUP 1A.3.7GRP

As many firms will not have dedicated, fixed portfolio resource, the first point of contact for many issues for such firms will be handled by the FCA's Contact Centre, with the aim being that fewer issues and queries will need to be referred to the supervisors. To support all firms the FCA will also provide regional workshops and road shows to clarify its expectations on these risks and issues that are particularly important to the FCA.

The nature of the FCA's relationship with the PRA

SUP 1A.3.8GRP

While respecting each regulator's different statutory objectives and mandates, in undertaking its supervisory activity the FCA will co-ordinate and co-operate with the PRA as required and necessary in the interests of the effective and efficient supervision of regulated firms and individuals. Both regulators will coordinate with each other as required under the Act, including on the exchange of information relevant to each regulator's individual objectives. However, the FCA and PRA will act independently from one another when engaging with firms, reflecting an independent but co-ordinated regulatory approach. Maintaining effective working relationships with the PRA will be vital to achieving the FCA vision. To this end, and as required under the Act, the FCA will maintain a memorandum of understanding with the PRA which will set out how the two organisations will work together.