Questions remain over FCA approach to future Arch Cru
Recently concerns have been raised regarding the proposed Financial Conduct Authority’s approach to prudential regulation.
Many have voiced concerns, notably Mark Field MP, that while the FCA is set to be a competent financial conduct regulator it may not have the in-house expertise to regulate prudentially investment firms similar to Arch Cru, Keydata and MF Global.
To a certain extent the FSA’s latest business plan could be viewed as evidence to support this view as it states that on the FSA’s demerger approximately 1100 staff will be transferred to the Bank of England. However, I wonder if the problem is more one of lack of information on how the FCA will actually prudentially regulate firms and what depth of expertise it will have at its disposal.
At present the most helpful information I could find was in the FCA approach document which was published last June. Paragraph 5.14 states that: “All firms will be subject to a minimum level of baseline supervision in line with international standards.
For the vast majority, prudential supervision will be on a ‘gone concern’ basis... In other words the focus will be on ensuring that firms can fail in an orderly manner, with appropriate levels of consumer protection, through the Financial Services Compensation Scheme, and the protection or segregation of client assets...
As with conduct regulation, there is likely to be a small number of firms whose failure, even if orderly, could threaten the integrity of a particular market.... For these firms, the FCA will follow a more active supervisory programme on a ‘going concern’ basis.
This should give the FCA sufficient time to intervene when problems occur and satisfy itself that the firm can be allowed to fail in an orderly fashion.”
But how will this type of supervision be achieved? For example will the FCA have two sets of supervisors operating within the organisation or will there be no distinction between prudential and conduct regulatory staff?
At present we do not really know and many of us are keeping a close eye on how the FSA is currently conducting supervisory visits in light of its move to so-called ‘independent but co-ordinated’ supervision.
Simon Lovegrove is a lawyer with the financial services team at Norton Rose LLP