FSA to stick with Arrow visits

In the remaining lifetime of the FSA, Hector Sants, chief executive of the watchdog, said he would retain the current Arrow review cycle.

Speaking at the Cityweek Conference, Mr Sants said from a firm’s perspective the key operational change presented by the demise of the FSA would be that the existing Arrow risk mitigation programme would be discontinued.

He said any outstanding actions would be split between those relevant to the conduct supervisory groups’ objectives and those that relate to the prudential supervisory group.

From 2 April onwards, Mr Sants said the two supervisory units would run their own risk mitigation programmes and firms would have two separate sets of mitigating actions to address.

In the remaining lifetime of the FSA, however, he said he would stick with the current Arrow review cycle.

So if a firm is due to complete an Arrow assessment before spring 2013, Mr Sants said it would still be subject to a supervisory review.

It would, however, now consist of two supervisory teams assessing the risks against their new objectives, he added.

Mr Sants said there would be two particular consequences of this approach.

Firstly, he said each supervisory group may well ask a seemingly similar question, but it needed to be understood that the purpose would be different.

For example, Mr Sants said both groups of supervisors would be concerned about the firm’s board and governance processes.

The prudential supervisors are concerned as to whether the risks to the firm’s stability are being well-managed, and Mr Sants said the conduct supervisors were concerned whether the firm’s customers were being fairly treated.

Secondly, he said there would not be a consolidated list of the required actions arising from the two supervisory assessments.

Mr Sants said: “Central to the concept of genuine twin peaks is that both sets of regulatory objectives are different and determined by Parliament to be of equal importance.

“Firms will thus be expected to address each set of actions arising from the prudential and conduct reviews with equal focus. To spell it out, the two groups of supervisors will not prioritise between prudential and conduct risk.”

Mr Sants comments came after it was announced the Financial Conduct Authority would replace the advanced risk recognition operating framework, the process through which the regulator supervises authorised firms, when it takes over from the FSA.

Speaking at the Tax Incentivised Savings Association’s annual conference last year, Margaret Cole, head of enforcement at the FSA, said for larger firms for which the FSA has a relationship manager, it will replace the Arrow framework with a new process that “hopefully will be easier to communicate to senior executives of boards of firms”.