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SUP 1A.1 Application and purpose

Application

SUP 1A.1.1 G

1This chapter applies to every firm, except that its relevance for an ICVC is limited as the FCA does not intend to carry out an assessment of an ICVC that is specific to that ICVC.

Purpose

SUP 1A.1.2 G

The Act (section 1L) requires the FCA to "maintain arrangements for supervising authorised persons". Section 1K of the Act also requires the FCA to provide general guidance about how it intends to advance its operational objectives in discharging its general functions in relation to different categories of authorised person or regulated activity. One purpose of this guidance is to discharge the duties of the FCA set out in sections 1L and 1K of the Act. The FCA's approach to supervision is also designed to enable it to meet its supervisory obligations in accordance with EU legislation, where applicable, including in relation to requirements arising otherwise than under the Act (for example, directly applicable EU regulations).

SUP 1A.1.3 G

The design of these arrangements is shaped by the FCA'sstatutory objectives in relation to the conduct supervision of financial services firms as well as the prudential supervision of firms not supervised by the PRA. These objectives are set out in Chapter 1 of the Act. The FCA has one strategic objective: ensuring that the relevant markets function well. In discharging its general functions, the FCA must, so far as is reasonably possible, act in a way which is compatible with its strategic objective and which advances one or more of its three operational objectives:

  1. (1)

    securing an appropriate degree of protection for consumers;

  2. (2)

    protecting and enhancing the integrity of the UK financial system; and

  3. (3)

    promoting effective competition in the interests of consumers in the markets for regulated financial services (or services provided by a recognised exchange in carrying on regulated activities in respect of which it is exempt from the general prohibition by virtue of section 285(2) of the Act).

SUP 1A.1.4 G
  1. (1)

    In designing its approach to supervision, the FCA has regard to the regulatory principles set out in section 3B of the Act. In particular, the FCA's regulatory approach aims to focus and reinforce the responsibility of the senior management of each firm (section 3B(1)(d) of the Act) to ensure that it takes reasonable care to organise and control the affairs of the firm responsibly and effectively, and develops and maintains adequate risk management systems. It is the responsibility of management to ensure that the firm acts in compliance with its regulatory requirements.

  2. (2)

    The FCA will have regard to the principle that a burden or restriction which is imposed on a firm should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction (section 3B(1)(b) of the Act). The FCA will, so far as is compatible with acting in a way which advances the consumer protection or the integrity objective, discharge its supervisory functions in a way which promotes effective competition in the interests of consumers.

SUP 1A.2 Introduction

SUP 1A.2.1 G
  1. (1)

    The Supervision manual (SUP) and Decision Procedure and Penalties manual (DEPP) form the Regulatory Processes part of the Handbook.

  2. (2)

    SUP sets out the relationship between the FCA and authorised persons (referred to in the Handbook as firms). As a general rule, SUP contains material that is of continuing relevance after authorisation.

  3. (3)

    DEPP is principally concerned with and sets out the FCA's decision making procedures that involve the giving of statutory notices, the FCA's policy in respect to the imposition and amount of penalties, and the conduct of interviews to which a direction under section 169(7) of the Act has been given or the FCA is considering giving.

SUP 1A.2.2 G

For a firm which undertakes business internationally (or is part of a group which does), the FCA will have regard to the context in which it operates, including the nature and scope of the regulation to which it is subject in jurisdictions other than the United Kingdom. For a firm with its head office outside the United Kingdom, the regulation in the jurisdiction where the head office is located will be particularly relevant. As part of its supervision of such a firm, the FCA will usually seek to cooperate with relevant overseas regulators, including exchanging information on the firm. Different arrangements apply for an incoming EEA firm, an incoming Treaty firm and a UCITS qualifier. The arrangements applying for an incoming EEA firm and an incoming Treaty firm are addressed in SYSC Appendix 1. For UCITS qualifiers see also COLLG.

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

Purpose

SUP 1A.3.1 G

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.3.2 G

The overall approach in the FCA supervision model is based on the following principles:

  1. (1)

    forward looking and more interventionist;

  2. (2)

    focused on judgment, not process;

  3. (3)

    consumer-centric;

  4. (4)

    focused on the big issues and causes of problems;

  5. (5)

    interfaces with executive management/Boards;

  6. (6)

    robust when things go wrong;

  7. (7)

    focused on business model and culture as well as product supervision;

  8. (8)

    viewing poor behaviour in all markets through the lens of the impact on consumers;

  9. (9)

    orientated towards firms doing the right thing; and

  10. (10)

    externally focused, engaged and listening to all sources of information.

The scope of the supervision model for firms

SUP 1A.3.3 G

The FCA supervision model risk assessment process applies to all firms, although the detail required may vary from firm to firm. For example, some firms may experience a highly intensive level of contact although others may only be contacted once every four years. Firms judged as high impact are likely to require a more detailed assessment. A peer review process within the FCA assists consistency and will be focused on firms and sectors of the industry that could cause, or are causing, consumers harm or threaten market integrity.

SUP 1A.3.4 G

The supervision model is based on three pillars:

  1. (1)

    the Firm Systematic Framework (FSF) - preventative work through structured conduct assessment of firms;

  2. (2)

    event-driven work - dealing with problems that are emerging or have crystallised, and securing customer redress or other remedial work (e.g. to secure the integrity of the market) where necessary; and

  3. (3)

    issues and products - thematic work on sectors of the market or products within a sector that are putting or may put consumers at risk

SUP 1A.3.5 G

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.3.6 G
  1. (1)

    The FCA intends to communicate the outcomes of its pillars of supervision 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'sstatutory 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.3.7 G

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.3.8 G

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.

SUP 1A.4 Tools of supervision

SUP 1A.4.1 G

In order to meet the statutory objectives and address identified risks to those objectives, the FCA has a range of supervisory tools available to it, including the power to impose financial penalties.

SUP 1A.4.2 G

These tools may be usefully grouped under four headings:

  1. (1)

    diagnostic: designed to identify, assess and measure risks;

  2. (2)

    monitoring: to track the development of identified risks, wherever these arise;

  3. (3)

    preventative: to limit or reduce identified risks and so prevent them crystallising or increasing; and

  4. (4)

    remedial: to respond to risks when they have crystallised.

SUP 1A.4.3 G

Tools may serve more than one purpose. For example, supervisory powers can be used to address risks which have materialised or to assist in preventing risks from escalating. In the first instance they are remedial; in the second, preventative.

SUP 1A.4.4 G

Some of these tools, for example the use of public statements to deliver messages to firms or consumers of financial services, do not involve the FCA in direct oversight of the business of firms. In contrast, other tools do involve a direct relationship with firms. The FCA also has powers to act on its own initiative to impose or vary individual requirements on a firm (see SUP 7) and to ban or impose requirements in relation to specific financial promotions. The FCA may also use its general rule-making powers to ban or impose requirements in relation to specific products, types of products or practices associated with a particular product or type of product. The use of the FCA's tools in its oversight of market practices, in ensuring the protection of client assets and for prudential supervision of FCA-only firms, will also contribute to the integrity and orderly operation of the financial markets.

SUP 1A.4.5 G

The FCA uses a variety of tools to monitor whether a firm, once authorised, remains in compliance with regulatory requirements. These tools include (but are not limited to):

  1. (1)

    desk-based reviews;

  2. (2)

    liaison with other agencies or regulators;

  3. (3)

    meetings with management and other representatives of a firm;

  4. (4)

    on-site inspections;

  5. (5)

    reviews and analysis of periodic returns and notifications;

  6. (6)

    reviews of past business;

  7. (7)

    transaction monitoring;

  8. (8)

    use of auditors; and

  9. (9)

    use of skilled persons.

SUP 1A.4.6 G

The FCA also uses a variety of tools to address specific risks identified in firms. These tools include:

  1. (1)

    making recommendations for preventative or remedial action;

  2. (2)

    giving other individual guidance to a firm;

  3. (3)

    imposing individual requirements; and

  4. (4)

    varying a firm'spermission in another way.

SUP 1A.4.7 G

For further discussion of the FCA's regulatory approach, see publications on the FCA's website.