Six failings that will trigger FCA enhanced supervision

The Financial Conduct Authority has listed six serious failings that will lead it to place firms under ‘enhanced supervision’, its new rapid response mechanism to deal with regulated companies that fall well short of required standards.

Developed in response to the recommendations from the Committee on Banking Standards and applied to all FCA-authorised firms, the new process enables to watchdog to eschew the more formal processes in favour of an accelerated, judgement-led response.

Indicators of the kinds of failings that will prompt a firm to placed under ‘enhanced supervision’ include:

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• repeated failings that when examined individually might not be considered serious;

• failings in several business areas, which might be an indicator of wider cultural issues within the firm;

• a poorly functioning board, for example failing to challenge executives or take a lead in considering conduct;

• control areas such as risk, compliance and internal audit being poorly managed, under-resourced, or unable to make their voices heard at board level

• evidence of weak risk management, which may be based on findings of investigations conducted by the Prudential Regulation Authority; or

• evidence of other weaknesses in the way in which the board and senior management influence key cultural factors, for example ‘tone from the top’, pay and incentives, and adherence to the organisation’s values.

Once a firm is put in enhanced supervision, the supervisors will review strategy - possibly involved the commissioning of a ‘skilled persons’ Section 166 report - and ensure there is a plan in place to return it to normal supervision by a specified date.

Progress against this plan will be monitored at regular intervals and corrective action taken if it is not on course, including eventual enforcement proceedings.

“Improving standards and culture of major institutions, and sustaining the improvements, is a task for the long term”, the FCA paper states.

“Through the use of the approach, we seek to tackle the underlying failings at a senior level in firms. Cultural change in the wider institution is likely to take much longer to happen”.

The new approach follows recommendations made by the Parliamentary Commission on Banking Standards this time last year, which gave regulators additional powers to address failures at the most senior levels of financial institutions.

The commission’s chairman Andrew Tyrie criticised the government’s response to the final report, stating it had “fallen short on a number of important points”.