On September 18, the UK Financial Conduct Authority (FCA) published two papers with new guidance (the “Guides”) regarding how it will supervise different types of UK regulated financial services firms in the future.
The FCA previously used four categories (denoted as C1 to C4) for the conduct classification of UK-regulated firms. However, the FCA has now simplified this approach and will now differentiate firms as either a “fixed portfolio firm” or as a “flexible portfolio firm.” Based on these two broad categories, the FCA will determine the nature and intensity of supervision needed of such firms.
Fixed portfolio firms are a small population of firms (out of the total number regulated by the FCA), which, based on factors such as size, market presence and customer footprint, the FCA considers will require the highest level of supervisory attention. These firms will be allocated to a named, individual supervisor, and will be proactively supervised by the FCA using a continuous assessment approach rather than on a reactionary basis.
Flexible portfolio firms comprise the balance (and the majority) of firms regulated by the FCA. Such firms are supervised on a reactionary basis, i.e., as and when the FCA receives a report or has concerns about the relevant firm’s activities or, otherwise. The FCA’s supervision is conducted on a proactive basis through market-based thematic work and programs of communication, engagement and education activity aligned with the key risks identified for the sector in which the relevant firm operates. Flexible portfolio firms will not be allocated a dedicated, named supervisor and, instead, will use the FCA’s Customer Contact Centre as their first point of contact with the FCA.
The focus of the guidance in the Guides is how the FCA approaches conduct supervision for each type of firm. In the Guides, the FCA reconfirms its prior guidance to the effect that it intends to examine each of the following areas to see how firms put the integrity of the market and the fair treatment of consumers at the heart of how they conduct their business: (1) business model and strategy; (2) culture; (3) front-line business processes; (4) systems and controls; and (5) governance. However, the Guides also focus on the FCA’s three-pillar model for supervising firms, with each of the three pillars of activity contributing to the FCA’s understanding of a firm, its sector and the risks arising from both.
The first pillar is firm or group supervision, and the FCA engages with firms to assess whether they have the interests of their customers and the integrity of the market at the heart of their business.
The second pillar is event-driven, reactive supervision; when the FCA becomes aware of significant risks to consumers or markets, or when damage has already been done, the FCA asserts that it will respond swiftly and robustly.
The third pillar is focused on issues and products supervision—whereby the FCA looks at each sector as a whole to analyze current events and investigates potential drivers of poor outcomes for consumers and markets.
The Guides make clear that the FCA will continue to interact with the UK Prudential Regulation Authority whenever necessary or appropriate.
The Guide for Fixed Portfolio Firms is available here.
The Guide for Flexible Portfolio Firms is available here.