What is future of supervison?
The Future of Supervision is a number of proposals put forward by PIMFA. The proposals identify a number of areas where PIMFA considers the Financial Conduct Authority (FCA) could make improvements in its role as a supervisor of regulated firms and in delivering its regulatory objectives. These include outlining how the FCA assesses its own suitability as a supervisor, improving data collection, as well as analysis, to better understand the activity of firms and what they do; improving intelligence gathering and review procedures; and taking swift action where needed to prosecute firms for criminal offences as they are entitled to do.
While firms are concerned about the rising cost of the Financial Services Compensations Scheme (FSCS) levy, of greater concern is the FCA’s level of accountability in terms of both its supervisory approach and the practical outcomes of that approach. Since launching the campaign to improve the FCA’s supervisory approach in 2020, PIMFA has noted improvements including a reduction in the FSCS levy burden on its member firms. However, issues remain. The FCA’s supervisory methodology remains unclear, and the process is not transparent.
PIMFA member firms still want to see:
- The FCA show a more in-depth understanding of the sector so it can supervise it more effectively
- The FCA work with its staff to ensure they receive the training they need and to manage high staff turnover
- The FCA reconsider its level of engagement with the regulated population – there are firms which are supervised on a portfolio basis but that are large enough to warrant a more frequent engagement
- The Regulator work with the sector so that a risk-based approach can be applied in full in Anti-Money Laundering supervision
PIMFA’s update to the Future of Supervision paper calls for the FCA to update its own Approach to Supervision paper and illustrate its vision for supervision in the future; the methodology used to supervise and risk assess firms; its vision for a hybrid “data-led” and “human-led” Regulator and the supervisory process as a whole and how engagement between the FCA and the regulated population will improve as a result of the changes in the operating models which are being implemented.
A change to a data-driven ecosystem, as proposed by the FCA, will have teething issues and the FCA will need to be vigilant for false positives/negatives, bias and data leakages. A very important function of the success of the regulator’s enhancement plans will be communication. It is beneficial to gather data from firms, analyse it and use it to risk-assess the regulated population, but it is also very important that the regulator remains engaged with financial institutions at all times. Getting buy-in from the regulated population will be essential to effective supervision.
In early 2020, PIMFA published a paper, ‘FCA Supervision – fit for purpose?’ which set out a number of issues for the FCA to consider in relation to its supervisory processes and made various suggestions for improvement.
The paper identified a number of issues which, in our view, are still outstanding, in particular:
- FSCS compensation costs have continued to rise as we have been witness to a number of scandals, where financial institutions have collapsed without warning leaving thousands of customers to fight to get their money back. That in turn has evolved into a sour debate about the “FSCS bill” or, for better want of words, the money every financial institution has to put into a sort of “insurance fund” which is used to compensate customers of failed financial institutions.
- The FCA’s supervisory methodology is unclear and the process is not transparent.
- Feedback from member firms still resulted in the following recommendations:
- That the FCA gains an in-depth understanding of the sector so they can supervise it more effectively
- That the FCA works with their staff to ensure that they receive the training they need and to manage high staff turnover (lack of continuity of supervisory staff has been quoted as a specific disruptive factor by PIMFA firms)
- That the FCA reconsiders its level of engagement with the regulated population – there are firms which are supervised on a portfolio basis but that are large enough to warrant a more frequent engagement
- That the FCA works with the sector so that a risk-based approach can be applied in full in AML supervision
However, in the last two years the FCA has made a number of changes which in our view could help both the regulator and the regulated population progress, and ultimately be beneficial to the financial sector and the economy as a whole.
- The regulator has increased its outward focus on the financial sector’s resilience
- The regulator has increased its inward focus on its own resilience, in the form of plans to improve and update its processes including investing in enhanced data solutions
Head of Regulatory Policy and Compliance
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Read the full short members paper now
Whilst we would reiterate the points raised in our 2020 publication, the aim of this paper is to concentrate on how the introduction of a culture of resilience for both financial institutions and the regulator can mitigate the risk of disorderly failure, improving the supervision of financial institutions and reducing the size of the FSCS bill. The paper considers how this can be implemented for maximum positive impact.
Mitigating disorderly failure, the main cause of high FSCS payouts is disorderly failure, so effectively managing the risk of disorderly failure is a first step towards mitigating the problem.
The following considerations need to be borne in mind:
• This is not a short-term fix. Managing the risk of disorderly failure on a large scale is an exercise which requires a number of structural changes to be affected over time.
• Achieving an effective management of disorderly failure risk requires long term thinking and buy-in from both the regulator and the financial services sector. It is an investment for the better, but it may take time for its beneficial effects to be observed.
• A zero-risk environment should not be pursued as it is not achievable. Disorderly failures will still happen, but targeted measures in place can help mitigate the risk of disorderly wind-down and therefore, in time, improve the quality and effectiveness of supervision and reduce the size of the FSCS bill.
Read the PIMFA Press Release on the future of UK supervision – ‘is the FCA fit for purpose?
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