The FCA has revealed details of an “enhanced supervision” programme designed to target firms with serious governance failures.
In a statement last week, the FCA said action taken against a firm under enhanced supervision would vary depending on the circumstances. The regulator says typically it will involve boards committing to specific measures to fix problems highlighted, with the FCA then reviewing the effectiveness of the solutions.
In the event the regulator deems the measures ineffective, the firm could face binding requirements for action from the FCA although these could be applied from the outset.
Where the regulator thinks oversight from an independent person would be valuable, it will require the firm’s board to bring in a suitable person using Section 166 powers. Section 166 reports, also known as skilled person reports, check for weaknesses or failings in a firm’s practices. The firm must meet the cost of carrying out the report.
The FCA says: “Enhanced supervision helps the FCA to address weaknesses in standards, governance and culture in firms. In some cases, enhanced supervision will be followed by an enforcement investigation.
“However, it is important that regulators use judgement, rather than a set of consequential processes, to determine what regulatory tools and powers are appropriate. Enforcement investigations may therefore begin without a firm having been placed in enhanced supervision.”
The new approach will be applied to firms that present a serious risk to the regulator meeting objectives .
The triggers for enhanced supervision include repeated conduct failure and a poorly functioning board (see box below).
Pinsent Masons senior financial services enforcement lawyer Michael Ruck says the regulator and firms are accustomed to the tools that may be used in the new approach. But he adds the triggers for enhanced supervision are not very specific.
He cites the condition of “evidence of other weaknesses in the way in which the board and senior management influence key cultural factors”.
He says: “That is pretty wide and could cover a multitude of potential sins. The FCA will interpret it as widely as possible and firms will interpret it more narrowly. With things like this, it always takes time until everyone really understands how it all works.”
King & Wood Mallesons SJ Berwin partner Tim Dolan says: “I do not think this will result in a great deal of change on a day-to-day practical level. Firms that have particular
issues and firms that pose the greatest systemic risk have always been subject to more intensive supervision.
“The FCA is doing this partly to send out a deterrence message and partly because it feels it needs to revisit the way it supervises and interacts with firms.
“But that is all part of being a relatively new regulator more than anything else.”
Ruck adds that the enhanced supervision programme continues the regulatory trend of targeting senior individuals in the hope of changing a firm’s culture.
He says: “It repeats phrases you see a lot from the FCA at the moment about boards, senior management and the tone from the top.
“It is all about saying they want to take action against individuals if things go wrong. That certainly focuses the mind.”
What could put a firm into supervision?
- Numerous or especially significant conduct failings or repeated failings that, when examined individually, may not be considered serious
- Failings in several business areas because this is seen as 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
- Evidence of 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
- Evidence of other weaknesses in the way in which the board and senior management influence key cultural factors.
Yellowtail Financial Planning Dennis Hall managing director Dennis Hall
In the past, the FCA has not intervened early enough so it is about time it started. New rules often get worked around or mean unintended consequences so it is welcome that the regulator chose not to make more.
Bestinvest wealth management director David Smith
Identifying these firms must include looking at customer complaints and the FCA can be slow at dealing with those. By the time complaints are processed and a trend has been seen, it is too late.
Philip J Milton Financial Services managing director Philip Milton
It is quite surprising at times when the FCA announces these new measures because most firms who take care to operate in an above-board way would assume the regulator was monitoring firms in this way already.