Could FCA supervision be changing this year?

The Gloster and Parker reports show the FCA needs a fundamental overhaul and change in culture. Morale will likely be close to an all time low in an organisation that has struggled to attract and recruit experienced staff, something that was exacerbated following its move to Stratford, London. This location is a bit Marmite, convenient for some people who live out East but a fairly painful journey for those further West.


Times have changed


When FSA was formed it benefited from the transfer of staff from the self regulatory organisations (SROs), for example IMRO and SFA. These were more attractive places to work as they focussed on individual sectors and valued the sectoral and industry expertise. Taking time out of a regulated firm to work at one of these SROs provided deeper expertise and experience for career risk and compliance officers.


The benefits of such a rotation faded as the FSA matured and sectoral expertise started becoming a feature of a small team rather than a fundamental resourcing requirement. This is partly due to the constant expansion of the regulator’s remit, with mortgages, general insurance, consumer credit, debt management, and claims management businesses all being added to a regulator that was already overstretched (Gloster report, Recommendation 12).


The sectoral expertise seems to have continually dwindled since the FCA was created and focus has shifted towards flexible resourcing and general skills. It is notable that the Gloster Report states the risks posed by LCF were only appreciated by two individuals with relevant industry experience.


The need for change


Given the state of the organisation that the new CEO is inheriting it will be important to quickly show the FCA taking swift and decisive action. One way to achieve that is by reviewing its approach to supervising firms.


Dedicating teams of people to supervising firms is expensive. The more economic and efficient way to supervise is to pick a topic and a sample of firms and to review how that sample of firms complies with the chosen topic. This is known as thematic supervision. It is an approach that I was instrumental in designing and establishing during my days at the then FSA.


When resources are under pressure and there are vacancies that cannot be readily filled, switching to more thematic supervision is an obvious choice for the new CEO. Thematic reviews allows FCA to be more nimble, and fleet of foot, in tackling cross cutting issues. Once a review has been completed in one sector it is relatively straight forward to read across results to another sector and look at a relatively smaller sample to validate the results read across. This can speed up issuing guidance or enforcement referrals.


Playing catch up


As we have noted in previous blogs, the FCA spent the past decade focussing on the banks and getting the much-needed culture and other post-crisis improvements made. Other sectors have lacked FCA attention resulting in FCA sending a series of Dear CEO letters to wholesale brokers in 2019 and in 2020 to multiple retail firms.


The retail sectors were payment services and e-money firms, wealth management and stockbroking, financial advisers, mortgage intermediaries, debt advisers, credit brokers, and personal and commercial lines insurers.


FCA will be following up with all these sectors and most likely through a combination of thematic work and investigations during 2021.


How does this impact firms?


If you are a smaller firm you will have become used to having limited supervisory contact so in some ways it will be more of the same, for larger firms they might expect a more limited relationship.


As set out above you can expect more thematic supervision, this is a double-edged sword. On the plus side being selected as part a thematic review should not be seen as negative, more likely you are seen as representative of a particular sector. However, if the FCA do find matters of significant concern they might consider taking action.


Forewarned is forearmed so we would recommend you look carefully at the FCA’s areas of thematic focus for the sectors you operate in and carry out a review to find areas of potential weakness. Potentially these can be remedied ahead of any visit but even if not the fact issues have been self-identified and there is a plan to fix them will count in your favour.


We have helped other firms in their responses to thematic reviews and are happy to have a conversation about how we could support you.

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