SUP 1.4 Tools of supervision

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.

Tools may serve more than one purpose. For example, supervisory powers can be used to address risks which have materialised or to assist in preventing risks from escalating. In the first instance they are remedial, in the second, preventative.

Certain of these tools, for example the use of public statements to deliver messages to firms or consumers of financial services, do not involve the FSA in direct oversight of the business of firms. Other tools do involve a direct relationship with firms. The FSA also has powers to act on its own initiative to impose individual requirements on a firm (see SUP 7).

The FSA uses a variety of tools to monitor whether a firm, once authorised, 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 firm;

4. (4)

   on-site inspections;

5. (5)

   reviews and analysis of periodic returns and notifications;

6. (6)

   reviews of past business;

7. (7)

   transaction monitoring;

8. (8)

   use of auditors;

9. (9)

   use of skilled persons.

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

1. (1)

   making recommendations for preventative or remedial action;

2. (2)

   giving other individual guidance to a firm;

3. (3)

   imposing individual requirements;

4. (4)

   varying a firm's permission in another way.

For further discussion of the FSA's regulatory approach, see publications on the FSA website (www.fsa.gov.uk): in particular, 'A new regulator for the new millennium' and 'Building the new regulator, Progress report 1'.