On 17 September, the Financial Conduct Authority (FCA) announced changes to the way it will supervise the firms it authorises, including how firms are classified, in order to support its sector-based approach. The changes reflect the FCA's acknowledgment that risks may be very different across different sectors but similar across firms within a sector.
Although continuing to look at the way individual firms and people behave, the FCA will increasingly look at how markets work as a whole with greater emphasis on sector and market-wide analysis. The supervision model has been revised to implement the FCA's supervisory strategy announced in December 2014.
Previously, firms were allocated across the C1-C4 conduct categories (C1 being highest risk and C4 being lowest risk) depending on their size, market presence and customer footprint. The FCA is moving away from that categorisation and firms will now be categorised as either 'fixed portfolio' or 'flexible portfolio' for supervisory purposes. The majority of FCA regulated firms, including consumer credit firms, will come within the flexible portfolio category.
Fixed portfolio firms will continue to be subject to a programme of firm or group-specific supervision (Pillar I) and will receive the highest level of supervisory attention.
Flexible portfolio firms, which are deemed to present a lower risk, will now be subject to event-driven reactive supervision (Pillar II) and thematic issue or product supervision (Pillar III). These firms will not have a named individual supervisor and their first point of contact will be through the FCA Contact Centre.
The FCA will focus at a market level, to understand conduct on a sector or subsector basis and mitigate risks accordingly. Flexible portfolio firms will be proactively supervised through a combination of market-based thematic work, as well as programmes of communication, engagement and education activity aligned to the key risks the FCA identifies for the sectors in which firms operate.
The FCA has stated it will be looking at far more than systems and controls and compliance with the rulebooks. It will be looking at business models and strategy, culture, front-line business processes, systems and controls and governance to see how firms achieve the FCA's fundamental expectations which remain that firms will have the interests of their customers and the integrity of the market at the heart of how they run their business.
Two separate guides have been published on the FCA's new approach to supervision for fixed and flexible portfolio firms. The guides bring together previously published information about the FCA's model and provide a summary of the supervision activity firms will experience. They are available from the FCA's website.
The guides also outline the FCA's approach to prudential supervision and confirm that the FCA will continue to interact with the Prudential Regulatory Authority where appropriate.
Despite the changes, flexible portfolio firms should still continue to work on the basis that a FCA inspection could arise at any time if the FCA considers, perhaps after receiving a high number of complaints, that event-driven supervision is required.
This article was originally published in Motor Finance October 2015.