The FCA’s approach to supervision

Culture

As stated in the FCA 2020/21 Business Plan, the culture and governance of firms remains a key area of focus for the FCA.

A firm’s culture can be summarised as the behaviour and mindset which drive an organisation. The FCA expects firms to continue to focus on their own culture and to recognise that their culture will evolve, including potentially as a result of changed working patterns due to Coronavirus. In the FCA’s view, culture needs to be continually assessed and managed so firms can assess the potential for harm.

When assessing a firm’s culture, the FCA will look at the four key drivers of culture within firms, and their effectiveness in reducing the potential for harm from firms’ business models and strategies, including:

The FCA continues to make speeches and publish material on what it considers to be a healthy culture and the board of firms should take note of this material.

Supervisory approach

The FCA divides the financial sectors it regulates into portfolios, each made up of firms with similar business models. Portfolios are fluid and adapt as business models change. For firms operating across different sectors or markets, the FCA assigns the portfolio which reflects their main business.

The FCA analyses each portfolio and agrees a strategy to address potential harms which it identifies, which includes taking action on firms posing the greatest harm. The FCA will look in particular at:

The FCA notes in its 2020/21 Business Plan that it will be shifting its focus to smaller firms in particular those that consistently fail to meet required standards.

The FCA has recently published a new supervisory correspondence webpage which locates all letters published to portfolio firms and also contains a link to all “Dear CEO” letters in one place. These letters are a useful summary of key areas of focus and risk which the FCA has identified and notified to firms and the board of firms should be aware of these.

SM&CR

The aim of the Senior Managers & Certification Regime (SM&CR) is to reduce consumer harm and strengthen market integrity by focusing on people and their personal accountability, not just on firms.

The SM&CR has been in place for banks since March 2016 and for solo-regulated firms since December 2019, however it is of course a continuing regime, with incremental changes and additional guidance issued by both the FCA and PRA. Recent guidance issued by the FCA includes positive and negative indicators in relation to assessments of fitness and propriety, and training staff on the Conduct Rules.

The changes to working patterns as a result of the Coronavirus pose challenges for firms not least in relation to delegation and supervision. The FCA has allowed some relaxations to the regime as a result of the Coronavirus but has been clear that Senior Managers will be held accountable for things that happened both during and after the pandemic. It is very important that Senior Managers record what they are responsible for and when there are changes these changes are recorded in updated Statements of Responsibilities and Responsibilities Maps.

If you require further information about anything covered in this briefing, please contact Grania Baird, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, September 2020