CRED 14.1 The FSA's approach to supervision

This section and SUP 1 apply to all credit unions.

This section is a summary of SUP 1.

The Act requires the FSA to "maintain arrangements designed to enable it to determine whether persons on whom requirements are imposed by or under this Act ... 1are complying with them" (paragraph 6(1) of Schedule 1 to the Act).

The design of these arrangements is shaped by the regulatory objectives. These are set out in section 2 of the Act (The Authority's general duties) and are:

1. (1)

   maintaining confidence in the UK financial system;2

   2
2. (1A)

   2contributing to the protection and enhancement of the stability of the UK financial system;

3. (2)

   promoting public understanding of the UK financial system;2

   2
4. (3)

   securing the appropriate degree of protection for consumers; and

5. (4)

   reducing the extent to which it is possible for a business to be used for a purpose connected with financial crime.

In designing its approach to supervision, the FSA has had regard to the principles of good regulation set out in section 2(3) of the Act. In particular, the FSA's regulatory approach aims to focus and reinforce the responsibility of the management of each credit union to ensure that it takes reasonable care to organise and control the affairs of the credit union responsibly and effectively, and develops and maintains adequate risk management systems. It is the responsibility of management to ensure that the credit union acts in compliance with its regulatory requirements. The FSA will have regard to the principle that a burden or restriction should be proportionate to the benefits which are expected to result from it.

The purpose of taking a risk-based approach to supervision is to focus the FSA's resources on the mitigation of risks to its regulatory objectives, and to have regard to the need to use the FSA's resources in the most efficient and economic way. The approach to risk assessment of credit unions is based on both the impact of such risks were they to crystallise and the probability of their doing so.

In order to meet the regulatory objectives and address identified risks to those objectives, the FSA has a range of supervisory tools available to it.

The FSA classifies these tools under four headings:

1. (1)

   diagnostic: designed to identify, assess and measure risks;

2. (2)

   monitoring: to track the development of identified risks, wherever these arise;

3. (3)

   preventative: to limit or reduce identified risks and so prevent them crystallising or increasing; and

4. (4)

   remedial: to respond to risks when they have crystallised.

The FSA uses a variety of tools to monitor whether a credit union remains in compliance with regulatory requirements. These tools include:

1. (1)

   desk-based reviews;

2. (2)

   liaison with other agencies or regulators;

3. (3)

   meetings with management and other representatives of a credit union;

4. (4)

   on-site inspections;

5. (5)

   reviews and analysis of periodic returns and notifications;

6. (6)

   reviews of past business;

7. (7)

   use of auditors;

8. (8)

   use of skilled persons.

The FSA also uses a variety of tools to address specific risks identified in credit unions. These tools include:

1. (1)

   making recommendations for preventative or remedial action;

2. (2)

   setting individual requirements;

3. (3)

   giving individual guidance to a credit union;

4. (4)

   varying a credit union's permission.

For further discussion of the FSA's regulatory approach, see Publications on the FSA website: in particular, "A new regulator for the new millennium" and "Building the new regulator progress report 1".