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What the FCA means by ‘judgement-based supervision’

This article is part of
Guide to Regulation Post-FSA

Judgement-based supervision revolves around three clear pillars, each of which has a distinct purpose, says Rebecca Prestage, head of policy at the Consulting Consortium.

These are:

• The Firm Systematic Framework, which replaces the Arrow system and represents preventive work effected through conduct assessment of firms;

• event-driven work, which the regulator says will deal faster and more decisively with problems that are emerging or have happened, and secure customer redress or other remedial work where necessary; and

• fast, intensive campaigns on sectors of the market or products within a sector that are putting, or may put, consumers at risk.

At ground level, the new approach will means supervisors will conduct in-depth and structured supervision work on those firms with the greatest potential to cause risk to consumers, market integrity or competition.

Consequently, some firms in some sectors may experience a higher intensity of supervision than others.

Sona Ganatra, senior associate at Fox Williams, explains that a judgement-based approach has been adopted as the previous regulator was frequently criticised for having a ‘tick box’ approach to supervision.

“The regulators therefore will take a wholesale approach when assessing firms and look at, for example, the wider implications of the firm’s conduct on consumers or the potential impact that the firm could have on financial stability,” she says.

However, while such a wholesale approach should be welcomed, Ms Ganatra says it will require a change in the skill set of the supervisors at the FCA in order to be effective.

This, she continues, will require strong commercial understanding and experience in order to assess, for example, product design.

“Given that the vast majority of the historic supervisory teams have remained unchanged and have simply been transferred across to their new regulatory bodies, whether the FCA and PRA have the right expertise to ensure that this approach will be successful in practice is unclear.”

Simon Morris, financial services partner at CMS Cameron McKenna, advises that the best course of action for firms is to make sure their systems and processes are all watertight.

“Every adviser firm would do very well to look at the quality of its governance, that it has done this with TCF in mind,” he says.

“A firm should review its approach to TCF so if challenged it can prove that [this] is at the heart of everything it does.”

He adds that the FCA’s use of behavioural economics as a tool in its judgement-based approach to conduct risk “makes it very clear that the FCA is Nanny and Nanny knows best; Nanny knows that firms have been naughty and firms’ management have been up to no good.”