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Supervision of smaller firms under the FCA

This article is part of
Guide to Regulation Post-FSA

The FCA will categorise firms into four conduct groups, ranging from C1 for those with a large number of retail investors to C4 for smaller firms, which will include “almost all intermediaries”.

Categories are not permanent, the FCA says, and so it will continue to monitor firms’ potential impact against its wider regulatory objectives and notify firms if their category changes.

In terms of how it will monitor those at the smaller end of the market, initially the regulator will identify the level of risk a firm poses through its Gabriel reports and data sources such as from site visits.

Those firms identified as high risk and around a quarter of medium-risk firms will be interviewed and receive verbal feedback from the regulator, with a follow-up letter to senior management that will set out any remediation points.

One key change is that smaller firms are now supervised by a team of specialists and not a dedicated supervisor, notes Rebecca Prestage, head of policy at the Consulting Consortium.

All firms that have a dedicated supervisor should have received a letter from the confirming the details of who their supervisor will be or, if a firm has changed to no longer having a dedicated supervisor, what this means for the firm in more detail.

The FSA’s existing Arrow (Advanced Risk Responsive Operating Framework) approach is being replaced by the FCA’s Firm Systematic Framework, which will assess whether a firm is being run in a way that results in the fair treatment of customers.

The smallest firms will now have a ‘touch point’ with the regulator once every four years.

These meetings will be to determine how the firm runs its business and could range from a roadshow to an interview, a telephone call, an online assessment or a combination of these, depending on the perceived level of risk a firm poses.

Ms Prestage notes that the new regime “will look more closely at firms’ business models and strategies, and ensure that clients, and the integrity of the market, are not being placed at undue risk.”

Five priority areas of focus will be:

• product design;

• distribution channels – transparency of products and services;

• over reliance on payment and product technology;

• risky funding strategies; and

• poor understanding of risk and return leading to consumers taking inappropriate risk.

In other words, says Sona Ganatra, senior associate at Fox Williams, “the FCA has adopted and expanded upon the approach taken by the FSA to small firms by applying it across a wider range of firms.

“It will supervise fewer firms on a relationship managed basis than the FSA, relying instead on thematic reviews and firm risk profiling.”

The new structure should mean C4 firms experience the least intrusive regulation, although this will depend on firms’ providing evidence that in all areas of the business they are employing best practice for the interests of clients.