On 24 April 2019, the FCA published its approach to supervision (the Approach) following on from the FCA’s March 2018 consultation paper on the same topic (our blog is here). The Approach gives an insight into the FCA’s approach to supervising firms and individuals, and sets out the FCA’s role in ensuring fair and honest markets; why and how the FCA priorities supervisory work; and how the FCA supervises in practice. An overview of key aspects of the Approach is set out below.
Chapter 2 of the Approach sets out eight supervisory principles underpinning the FCA’s work, which are designed to complement the FCA’s Principles for Businesses. The supervisory principles are
- forward looking;
- focus on strategy and business models;
- focus on culture and governance;
- focus on individual as well as firm accountability;
- proportionate and risk based;
- two way communication;
- co-ordinated; and
- put right systematic harm that has occurred and stop it happening again.
Chapter 3 sets out the FCA’s priorities and focus as regards supervision. Particularly, and alongside its market priorities, the FCA details the following as key to its supervisory approach:
- the role of business models: the FCA uses business model analysis to identify aspects of a firm’s business model that indicate higher levels of risk. This analysis also helps to anticipate problems in individual firms and markets;
- the role of culture and individuals: the FCA focuses on the drivers of behaviour and the role individuals play within firms. A firm’s managers are responsible for the firm’s culture, and for preventing harm. The FCA provides feedback on, and challenges, the behaviour it observes through supervisory engagement. The FCA will look at the purpose of a firm to understand what it is trying to achieve in practice, not just what is written in its mission statement; and
- the role of prudential supervision: the FCA is the prudential supervisor for approximately 46,000 firms. As described in its Mission, the FCA’s supervisory work aims to avoid disorderly failure and minimise the harm to consumers or the integrity of the UK financial system.
Chapter 4 sets out a detailed structure of how the FCA supervises. This is focused around four prime processes: (i) the identification of harm; (ii) diagnostic tools; (iii) remedy tools; and (iv) evaluation. Annex 1 of the Approach sets out the FCA’s feedback statement to its consultation on the Approach. Annex 2 sets out the FCA’s firm assessment model. This comprises nine key areas of a firm that the FCA makes a judgement on, the areas are separated into two categories: business model and strategy; and culture.