UK: Delivering Effective Supervision

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With so much EU derived legislation coming into effect in the new year, such as MiFID II, PSD2, PRIIPS and the IDD, UK financial services businesses may be forgiven for not having focused yet on significant coming changes to the way in which the FCA supervises firms. It’s worth remembering here that the FCA supervises both dual-regulated (with the PRA) and solo-regulated firms for conduct including markets (incidentally, it also supervises solo-regulated firms for prudential matters in respect of which there are four supervision categories independent of the conduct categories).

The new supervisory arrangements will be launched early 2018 with the publication of an “Approach to Supervision” document. In this connection, the FCA’s October board meeting reviewed its “Delivering Effective Supervision” (DES) project. So what changes can firms expect?

The DES project envisages supervision as a “pre-emptive and collaborative tool” using established project methodology including milestones and deadlines. The project will seek to deliver a higher degree of consistency around the supervision of different firms. It is intended that the supervisory approach to fixed and flexible firms will converge and, in recognition, these categories may be renamed. Additionally, the FCA stresses the importance of supervisors’ understanding individual firms’ culture, governance arrangements and business models as forming the background to many of the issues which firms face. The revised approach is also intended to improve communication by the FCA with all the firms its supervises – accepting by implication that there is room for improvement.

The FCA stresses the importance of supervisors’ understanding individual firms’ culture, governance arrangements and business models as forming the background to many of the issues which firms face.

The firm categorisation review (between fixed and flexible categories), which took place earlier this year, used impact rather than probability metrics although other criteria will be used to decide whether to include a firm within the fixed portfolio, such as a public confidence test. Currently, fixed portfolio firms (a small group) with a named supervisor are proactively supervised using firm-specific continuous assessment. In contrast, the FCA supervises flexible portfolio firms (being most firms) through thematic and market-based work, alongside programmes of communication, engagement and education aligned to the key risks identified in their sector. The Customer Contact Centre is their first point of contact.

All flexible firms will be analysed and clustered within a portfolio of firms with similar business models. Clustering firms in this way is intended to allow a better understanding of the specific issues which they face. Although each firm will have a designated point of contact for most issues, where there are significant strategic issues, concerns about viability or customer detriment these would be escalated to the relevant supervisory head of department.

In another change, the existing watch and enhanced supervision lists will be replaced with a single watch list to sit alongside the specific firm categorisation. According to the FCA, this will be used for direct intervention and enhanced supervision of any type of firm where circumstances require. A formal decision would be needed by FCA supervision to add a firm to the list with milestones to be met before their potential removal. Significantly under the DES project, the FCA will likely over time move resource from fixed portfolio work to the “flexible space”. Some firms will also move from the fixed to the flexible portfolio. This reflects a trend towards reducing the number of firms having permanent supervision teams and trimming those resources to deploy them more flexibly among the general population of supervised firms.

All in all, there is much for firms to consider and the Approach to Supervision document, when published, will be essential reading.

Richard Powell is a professional support lawyer within Baker McKenzie's global financial services group where he is responsible for supporting the group's legal and technical knowledge.