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Regulation by risk

The FSA is focusing on a radical new risk-based approach to supervising firms to apply resources to the areas we believe pose the greatest risk to statutory objectives.

We will be seeking to identify areas of concern. The risks will relate to the FSA&#39s four statutory objectives of market confidence, consumer protection, public understanding and reducing financial crime.

They should not be confused with commercial risks and within financial markets generally.

Over recent months, all investment firms have been assessed using a risk-based methodology looking at the impact of the risks that a firm might pose to our statutory objectives and, for higher-impact firms, considering the probability of risks occurring.

The assessment was wide ranging and took into account the size of a firm, the types of business activities it undertakes and how it controls its business.

This will enable us to regulate in a sharper, more cost-effective way. The new app- roach means that changes are required. Investment firms will see a change in our relationship with them, including greater emphasis on the responsibility of senior managers for what goes on in their firms.

We have allocated each firm to one of four risk categories – A to D – where A represents firms with the highest perceived risk to our objectives.

The relationship we will have with a firm will depend on where it is on the scale. The relationship management department within the investment firms division will supervise around 1,075 category A to C firms.

These firms will have a dedicated supervision team who will carry out ongoing detailed risk assessments of the firms they supervise and design and execute programmes to mitigate those risks for each firm.

The team will develop a greater understanding of the firms and the industry sectors that fall within its responsibilities. It will be responsible for day-to-day contact with the firm and will handle queries from it.

For lower-impact category D firms, detailed probability assessments and risk mitigation programmes were not prepared.

These firms are not allocated to a specific supervisory team. Issues relating to the firm will be dealt with on a case-by-case basis by the regulatory events department, whose specialist contact centre will handle queries from the firm.

The regulatory events department will provide case support for the relationship teams if an issue arises concerning a category A to C firm which goes beyond d ay-to-day supervisory management.

So while higher-impact firms will have a dedicated contact point within the relationship management department, the regulatory events department will provide support if needed.

The risk-based approach will determine the nature and frequency of supervision visits. For firms in higher-risk categories, visits will be part of a tailored approach to mitigate the risks.

The FSA expects to regulate large numbers of low-impact firms using a remote monitoring approach with visits focusing on specific concerns or as part of theme work carried out by the themes department on a sectoral or cross-FSA basis.

The FSA will be making greater use of a wider range of regulatory tools, ranging from disclosure and consumer education to using our rule-making powers, investigations and disciplinary action.

The tool will depend on type of firm, circumstances and risk. This does not mean a lighter-touch regime or that those firms that have a closer relationship with the FSA will present a safer haven for consumers. The rules will apply, irrespective of the supervisory relationship.

We will expect firms to have robust systems and controls to avoid harming investors and for senior managers to take responsibility for their effectiveness.

Lower-impact firms will be subject to remote monitoring tools, including desk-based monitoring of returns and analysis of market trends. For example, we will be seeking to identify themes or trends affecting the industry, sectors or consumers.

Firms can expect to be included in thematic reviews, perhaps involving a focused on-site visit. Theme analysis aims to anticipate and reduce the occurrence or impact of significant problems.

The themes department will look for potential problems and develop a plan for dealing with them. Examples of themes include stakeholder pensions, Isas and FSAVCs.

The department may also look at such issues as record keeping, outsourcing or the impact of external forces on the market.

Following the completion of a theme, the FSA&#39s conclusions will be made public and could result in, for example, guidance to firms in a particular sector. It may require generic remedial action to be taken by firms that took part in the theme and firms in the relevant sector(s).

We will ensure that the departments co-operate closely by sharing market and firm-specific intelligence so we can deliver a seamless packaged approach.

The pieces of the regulatory jigsaw are nearly all in place. Some fine-tuning may be needed as the new system beds in and we hope firms will be able to build their future business plans with more certainty.

These important changes have already come into effect and all firms to which they apply will have received a letter from the relevant department within the investment firms division confirming the FSA&#39s point of contact with the firm.

The department aims to run roadshows which will further explain the risk-based approach. Firms will be able to raise any questions. In the meantime, firms should contact their relationship team or the contact centre if they are uncertain about the effect of the changes.


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