The FCA’s approach to supervision is judgement-based, pre-emptive and focused on the major issues that drive consumer outcomes and market integrity.
A particular emphasis in placed on understanding the culture within a firm as the FCA determines that an effective culture ensures customers are treated fairly and markets are not abused.
C4 firms are supervised on a sector based approach and in doing so the FCA looks at how firms mitigate risks in relation to:
- Frontline Business Processes
- Systems and controls
- Business model analysis
The FCA’s policy statement ‘Tackling serious failings in firms‘ details outlines how it will address serious failings of standards, governance and culture in firms.
Whilst the statement initially refers to the Parliamentary Commission on Banking Standards; it clear that the statement applies to all regulated firms.
The FCA in its supervisory approach operates a three pillar model to supervision:
- Pillar I proactive firm supervision (the Firm Systematic Framework)
- Pillar II event-driven, reactive supervision
- Pillar III issues and products supervision
Supervisory action in Pillar II may examine risks or problems which are firm specific and the FCA expects firms to have a plan to mitigate risks.
The Pillar 3 approach is based on thematic review and will focus on emerging risks or new products and issues common across firms or sectors.
The FCA will engage with firms under the Pillar 1 approach and measure the effectiveness of the senior management in identifying and addressing risks and the controls it has in place as well as looking at the business model and future strategy, culture and key processes, controls and governance.
The FCA will make judgements about firms as a whole.
The FCA work carried out in the Firms Systematic Framework referred to under Pillar 1 include:
- Examining the firm’s ‘Business Model and Strategy Analysis’ and to identify evidence of common areas of heightened risk arising from this;
- Undertaking ‘Deep dive assessments’ and focusing on four risk areas – culture and governance; product design; sales and transaction processes; and post-sales and transaction handling;
- Continuing to maintain proactive engagement with key individuals and senior management in the largest firms.
Findings from the Pillar 1 approach may give rise to “Enhanced Supervision” resulting from a serious failure of culture, governance or standards within the business.
Various failings and observations may be taken into account when a firm is placed in Enhanced Supervision which could also give rise to powers under s166 of FSMA.
The FCA rolled out the Pillar I approach for retail intermediary and credit union firms. The FCA will begin sector-specific approaches from July 2014 to C4 firms in other sectors.
All C4 firms can expect to receive a four-yearly assessment, either face-to face interview, a telephone interview or an online or paper-based assessment.
This is in addition to the base line monitoring through other means such as submissions made to the FCA either GABRIEL or firm applications. These reviews could give rise to probing in other areas of your business and in serious cases may lead to an Enhanced Supervision where it perceives firms posing a serious risk to its objectives from a failure of culture, governance or standards.
We would wish to ensure that our clients have robust controls and procedures in place with a good compliance culture from the top down.
How can Complyport Help with FCA Supervision?
Our team of compliance professionals will challenge firms to review their business models and work with these firms to assess each of the areas identified under Deep Dive above.
We will work with you to highlight potential regulatory risks within the firm’s business and consider how these are mitigated.
We will question the compliance culture within the firm and staff awareness of their regulatory responsibilities and assist firm in ensuring that culture is embedded from the top down;
We will look to review the firm’s internal processes and practices and ensure that procedures and monitoring are more than adequate to mitigate potential conflicts of interest between the firm and its clients and ensure that the firms systems and controls are appropriate to the firm’s business to identify and manage conduct risks.
The elements of our work may entail review of the firm’s compliance monitoring in relation to pertinent areas of the FCA rules including systems and controls, Financial Crime and Money Laundering, Market Conduct, Financial Promotions and Training and Competence.
We may conduct high level interviews with key staff and assist with the procedures for the assessment of approved persons