In a paper released today (July 20) entitled ‘Together We Grow’, the trade association said there has been a “sour debate” about the increased cost of the FSCS levy to well run firms, “who are ultimately left to compensate customers of failed financial institutions.”
While noting that stopping disorderly failures is a long-term mission requiring buy-in from both the regulator and the financial services sector, Pimfa said the aim of its paper is to concentrate on how the industry can mitigate against failure, improve the supervision of firms and reduce the size of the FSCS bill.
Pimfa acknowledged the FCA had made progress in the way in which firms are supervised, notably through plans to improve and update its processes, including investing in enhanced data solutions.
However, it said the FCA’s supervisory methodology remained "unclear", and that the process is not "transparent".
Pimfa’s head of regulation, policy and compliance, Alexandra Roberts said this showed there is still much to do “as firm’s often feel that the regulator doesn’t fully understand them and that better communication is needed.”
“A more data-led approach to supervision is certainly welcome, but this is a long-term project and we do not know how wide the positive impact will be and when we will start to see the benefit,” Roberts said.
According to Roberts, the last few years have seen a shift towards a more robust and resilient industry as it and the regulator faced unprecedented events such as the pandemic.
But she stressed it remains important that both the financial sector and the FCA continue to work together to ensure the risk of disorderly firm failures is mitigated against.
“The last two years have shown we can work together more effectively. We must continue to do so and improve,” she said.
Vision
Among its recommendations for the regulator, Pimfa called on the FCA to update its 2019 document “FCA Mission: Approach to Supervision” which describes why and how the FCA supervises.
Pimfa said the regulator should lay out its vision for “supervision in the future” and provide the methodology used to supervise and risk-assess firms.
It also asked the FCA to outline how, if any, the events in the last two years have impacted the way the FCA thinks about supervision.
Data requests
In light of plans by the FCA to invest in enhanced data solutions to bolster its resilience, Pimfa said that while this is positive, data requests need to be relevant to the sector they are requested from and that blanket data requests can easily backfire.
It also said the regulator should minimise ad-hoc data requests as firms may have difficulties gathering the data in a tight time scale and this could lead to lower quality data.
Pimfa said: “A very important function of the success of the regulator’s enhancement plans will be communication. It is beneficial to gather data from firms, analyse it and use it to risk-assess the regulated population, but it is also very important that the regulator remains engaged with financial institutions at all times. Getting buy-in from the regulated population is essential to effective supervision.”
Other recommendations made by Pimfa included for the FCA to explain to firms why data is being requested and how it will be used while also ensuring there is a feedback loop.
It also recommended sharing of data to help financial institutions comply with regulations and provide firms with a portal where they can see a snapshot of their firm data and visualise “flags” where the firm is at risk of breach and indicate what rules would be breached.
Additionally it recommended that such a portal would allow firms to see their data benchmarked against the firm’s sector data and allow for communication between the firm and the FCA, creating a firm/supervisor audit trail.
The FCA has said it will read Pimfa's report and consider its recommendations.
It said: “We are always mindful of the impact our supervision has on firms and we are transforming as an organisation – our recent three year strategy sets out how we will deliver on our priorities of preventing serious harm, setting higher standards and promoting competition."
“As part of this we are working to first stabilise, then reduce the proportion of redress liabilities that failed firms leave in the system and stabilise the FSCS levy over a multi-year period,” it added.
jane.matthews@ft.com
