MIGI 10.2 Framework

We first described our approach to regulation in A New Regulator for the New Millennium, which we published in January 2000. We have continued to explain our progress and any new developments in our approach to regulation in a number of subsequent progress reports.

We have four statutory objectives which enable us to prioritise our efforts and focus on the most significant risks we face as a financial services regulator.

In setting our regulatory priorities, we assess the risks posed to our objectives by the firms we regulate. We quantify the risks posed by individual firms, taking into account the effect of factors such as prevailing market risk, product risk, and most importantly, customer risk. All risks identified are measured in terms of their severity if they occur (their impact) and the probability of their occurrence. The outcomes of this process are used in deciding how to supervise each authorised firm.

A small firm with a basic business model, a local retail client base, low turnover and no recent history of regulatory problems is likely to be 'low impact', and its regulatory relationship with us will reflect this. These firms do not have a dedicated FSA relationship manager but are able to deal with us, using a dedicated contact centre or via the internet.

An important part of the supervision of low impact firms is the receipt and monitoring of data returns and other notifications. Firms are required to send us periodic regulatory information via the 'RMAR' (see Part I, Chapter 11). We use this information to assess firms' financial soundness and identify potential breaches of regulatory requirements. We are unlikely to carry out routine visits to low impact firms. Instead, we may make visits in response to risks identified from regulatory data or other information sources. In addition, the firm or its business may be included from time to time in our sector-wide projects (thematic work), which monitor general compliance standards and investigate cross-industry risks.

We have developed a supervision strategy for small firms which includes the elements above. Its primary focus is on mitigating the risk posed to our objectives by financial and compliance failures by a substantial number of low impact firms within a sector. Although individually small firms are low impact, collectively the impact of these firms may be much greater.

The overall strategy includes:

1. (1)

   gathering information on all firms;

2. (2)

   focusing resources on thematic work and where appropriate reacting to any issues that arise;

3. (3)

   helping newly authorised firms to raise their own standards; and

4. (4)

   helping good firms to maintain standards.

Where a firm is non-compliant, we will take enforcement action where we consider that is appropriate. Where firms show a lack of awareness of regulations we will try to help these firms to help themselves, for example, by providing regular guidance updates on our website and by means of a 'good practice guide'. We will also encourage these firms to increase their level of training and to make use of trade associations, product providers, auditors and consultants.

Where a firm is compliant, we will try to help it maintain high standards. Such a firm provides a benchmark of good practice that can be spread more widely within the total population of firms.