August CPD Newsbrief — Financial services regulation and ethics
C4 advisory firms get guidelines
The FCA has set out what it expects of the 25,000 C4 firms it supervises in a new guide that also explains what C4 firms can expect from the regulator.
At the heart of the FCA’s supervision model is consumer protection and market integrity. To identify the areas that have an impact on consumers, the FCA needs to look further than systems and controls and compliance with the Handbook. It wants to know how businesses are run, about their financial health and the ways firms aim to make money now and in the future. It needs to know where and how problems arise so that it can address their sources.
The supervisory regime for many C4 firms is similar to the position under the FSA in terms of intensity and the type or supervision these businesses will experience. However, the FCA will now be looking at the culture and business practices of each firm to ensure that consumers and market integrity are considered in everything that they do.
The FCA will carry out baseline monitoring of regulatory returns, and will conduct four-yearly assessments of each firm by telephone, online or face to face. Apart from the occasional routine tasks, such as acquisitions and permission changes, the ongoing supervision of this category of firm is mainly achieved through sectoral analysis and thematic reviews.
Most firms that are in the C4 category for conduct supervision come under the P3 category for prudential regulation — that is the lowest intensity of supervision. P3 firms are those whose failure is unlikely to have significant market impact even if it is disorderly. So unless the FCA becomes aware that a specific P3 firm has breached its prudential regulatory requirements, it does not carry out regular prudential assessments or challenge its financial calculations or question how it meets its financial resources requirements. Instead, prudential supervision of P3 firms is achieved through targeted cross-firm work, assessing whether firms across a peer group are meeting the requirements.
The FCA has an overarching strategic objective to ensure that financial markets function well, so it has to strike a balance in supervising the financial services industry — allowing it to grow and prosper, while ensuring firms maintain their integrity and treat consumers fairly. The new guides, one for each category of firm C1 to C4, don’t provide step-by-step detail of every aspect of supervision; instead they bring together previously published information about the FCA’s model, summarise the supervision activity a firm will experience and explain the reasoning behind their approach. The FCA says it is committed to a more “open and transparent approach” to supervision and has pledged to work with firms to identify problems before they can cause damage.
A number of firms have already made changes to protect consumers and improve markets, and the FCA believes that its new approach to supervision will help to rebuild trust in the financial services industry and provide a “stable and fair future for firms and consumers alike”.
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