1This chapter applies to every firm, except that its relevance for an ICVC is limited as the FCA does not intend to carry out an assessment of an ICVC that is specific to that ICVC.

The Act (section 1L) requires the FCA to "maintain arrangements for supervising authorised persons". Section 1K of the Act also requires the FCA to provide general guidance about how it intends to advance its operational objectives in discharging its general functions in relation to different categories of authorised person or regulated activity. One purpose of this guidance is to discharge the duties of the FCA set out in sections 1L and 1K of the Act. The FCA's approach to supervision is also designed to enable it to meet its supervisory obligations in accordance with requirements arising otherwise than under the Act (for example, onshored regulations)3.

The design of these arrangements is shaped by the FCA'sstatutory objectives in relation to the conduct supervision of2firms as well as the prudential supervision of firms not supervised by the PRA. These objectives are set out in Chapter 1 of the Act. The FCA has one strategic objective: ensuring that the relevant markets function well. In discharging its general functions, the FCA must, so far as is reasonably possible, act in a way which is compatible with its strategic objective and which advances one or more of its three operational objectives:

1. (1)

   securing an appropriate degree of protection for consumers;

2. (2)

   protecting and enhancing the integrity of the UK financial system; and

3. (3)

   promoting effective competition in the interests of consumers in the markets for regulated financial services (or services provided by a recognised exchange in carrying on regulated activities in respect of which it is exempt from the general prohibition by virtue of section 285(2) of the Act).

1. (1)

   2The meaning of “UK financial system” when used in Chapter 1 of the Act includes regulated claims management activities.

2. (2)

   The term “regulated financial services” when used in Chapter 1 of the Act includes services provided by an authorised person in carrying on any regulated activity. Accordingly, for the purposes of Chapter 1 of the Act: a regulated claims management activity is a “regulated financial service” and a customer of a firm carrying on a regulated claims management activity is a “consumer” for the purposes of the FCA’s consumer protection and competition statutory objectives.

1. (1)

   In designing its approach to supervision, the FCA has regard to the regulatory principles set out in section 3B of the Act. In particular, the FCA's regulatory approach aims to focus and reinforce the responsibility of the senior management of each firm (section 3B(1)(d) of the Act) to ensure that it takes reasonable care to organise and control the affairs of the firm responsibly and effectively, and develops and maintains adequate risk management systems. It is the responsibility of management to ensure that the firm acts in compliance with its regulatory requirements.

2. (2)

   The FCA will have regard to the principle that a burden or restriction which is imposed on a firm should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction (section 3B(1)(b) of the Act). The FCA will, so far as is compatible with acting in a way which advances the consumer protection or the integrity objective, discharge its supervisory functions in a way which promotes effective competition in the interests of consumers.

1. (1)

   The Supervision manual (SUP) and Decision Procedure and Penalties manual (DEPP) form the Regulatory Processes part of the Handbook.

2. (2)

   SUP sets out the relationship between the FCA and authorised persons (referred to in the Handbook as firms). As a general rule, SUP contains material that is of continuing relevance after authorisation.

3. (3)

   DEPP is principally concerned with and sets out the FCA's decision making procedures that involve the giving of statutory notices, the FCA's policy in respect to the imposition and amount of penalties, and the conduct of interviews to which a direction under section 169(7) of the Act has been given or the FCA is considering giving.

For a firm which undertakes business internationally (or is part of a group which does), the FCA will have regard to the context in which it operates, including the nature and scope of the regulation to which it is subject in jurisdictions other than the United Kingdom. For a firm with its head office outside the United Kingdom, the regulation in the jurisdiction where the head office is located will be particularly relevant. As part of its supervision of such a firm, the FCA will usually seek to cooperate with relevant overseas regulators, including exchanging information on the firm. 1

The FCA will adopt a pre-emptive approach which will be based on making forward-looking judgments about firms' business models, product strategy and how they run their businesses, to enable the FCA to identify and intervene earlier to prevent problems crystallising. The FCA's approach to supervising firms will contribute to its delivery against its objective to protect and enhance the integrity of the UK financial system (as set out in the Act). Where the FCA has responsibilities for prudential supervision, its focus will be on reducing the impact on customers and the integrity of the financial system of firms failing or being under financial strain. In addition, when consumer detriment does actually occur, the FCA will robustly seek redress for consumers. This approach will be delivered through a risk-based and proportionate supervisory approach.

1The following supervisory principles will guide the FCA’s supervisory work.

1. (1)

   Forward-looking – the FCA will aim to pre-empt or address poor conduct so that risks do not arise and any associated harm does not materialise or if the harm is likely to materialise to ensure it does not cause significant harm to consumers or the UK financial system.

2. (2)

   A focus on strategy and business models – the FCA will assess a firm’s business model to:

   1. (a)

      identify emerging risks of harm and to ensure that the FCA’s supervisory activity mitigates the risks identified; and

   2. (b)

      develop a strong understanding of a firm’s business model for the purposes of identifying whether there is poor alignment between a firm’s profit incentive and the interests of consumers and the relevant markets functioning well.

3. (3)

   A focus on culture and governance – the FCA will:

   1. (a)

      look at what drives behaviour within a firm: for example, the firm’s purpose as it is understood by the firm’semployees, the attitude, behaviour, competence and compliance of the firm’s leadership, the firm’s approach to managing and rewarding people (e.g. staff competence and incentives), and the firm’s governance arrangements, controls and key processes (e.g. for whistleblowing or complaint handling);

   2. (b)

      in relation to governance, assess effectiveness, and not merely design. The FCA will focus on a firm’s conduct risk framework. For example, whether the firm has effective governance arrangements in place to identify the risk of harm to consumers or the UK financial system and whether the firm has a strategy in place to manage and mitigate those risks; and

   3. (c)

      seek to address any drivers of behaviour which are likely to cause harm.

4. (4)

   A focus on individual as well as firm accountability – the FCA will:

   1. (a)

      approve and hold to account the most senior individuals whose decisions and personal conduct have a significant effect on the conduct of their firm; and

   2. (b)

      as part of the Senior Managers and Certification Regime, expect firms to take responsibility for certifying the competence and integrity of employees with the potential to cause significant harm.

5. (5)

   Proportionate and risk-based – the FCA will:

   1. (a)

      use its understanding of the UK financial system and firms’ business models to target firms where misconduct would cause the most harm (especially to vulnerable consumers or important markets) and firms where misconduct is most likely to be significant; and

   2. (b)

      systematically use intelligence to target its engagement from a broad set of sources. This includes complaints data, whistleblowers, the FCA’s contact centre, regulatory returns, other regulators and competitor firms.

6. (6)

   Two-way communication – the FCA will:

   1. (a)

      engage directly with consumers and their representatives to understand issues they face and target firms that may be causing harm;

   2. (b)

      engage with industry, firms and market participants to understand how they are responding to market-wide events, firms-specific events and the regulatory framework and to adjust the FCA’s opinions and approach where appropriate;

   3. (c)

      be clear with firms and individuals about good and poor practice that the FCA observes; and

   4. (d)

      be as transparent as possible about the FCA’s work and its priorities for the coming year.

7. (7)

   Co-ordinated – the FCA will:

   1. (a)

      ensure its Supervision teams work closely with those in its Authorisations, Market Oversight, Policy, Competition and Enforcement functions to reach robust decisions and share information and provide consistent messages;

   2. (b)

      share intelligence with other regulatory bodies such as the Bank of England, Payment Systems Regulator, the Financial Ombudsman Service Limited and the Pensions Regulator; and

   3. (c)

      as a supervisor of global firms and global markets, work with regulators overseas to supervise these firms and markets on issues which are common across national borders.

8. (8)

   Put right systematic harm that has occurred and stop it happening again – the FCA will:

   1. (a)

      where it sees systematic harm, move quickly to stop harm occurring. For example, through imposing an Own Initiative Requirement (OIREQ) on the firm and, where appropriate, ensuring that the firm addresses the drivers of culture and its business model and strategy to prevent a recurrence;

   2. (b)

      where it suspects serious misconduct, refer to its Enforcement Division for an enforcement investigation; and

   3. (c)

      seek to obtain redress for affected consumers. The FCA may, for example, seek to put this right by requiring a consumer redress scheme, engaging directly with the firm, or by working with other authorities such as the Financial Ombudsman Service Limited.

The FCA supervision model applies to all firms, although the application of the model1 may vary from firm to firm. For all firms, whether supervised with a dedicated supervision team or supervised as part of a portfolio, the FCA will complete analysis and assessment and communicate to firms on a regular basis its programme of work, view on the main risks of harm and the steps it, the FCA, will require firms to take1.

The supervision model is based on three types of work1:

1. (1)

   proactive – pre-emptive identification of harm through review and assessment of firms and portfolios: this includes business model analysis and reviewing the drivers of culture1;

2. (2)

   reactive – dealing with issues that are emerging or have happened to prevent harm growing1; and

3. (3)

   thematic – wider diagnostic or remedy work where there is actual or potential harm across a number of firms.1

In order to create incentives for firms to raise standards and to maximise the success of the FCA's supervisory arrangements, it is important that a firm understands the FCA's evaluation of its risk so that it can take appropriate action.

1. (1)

   The FCA intends to communicate the outcomes of its supervisory work1 to each firm within an appropriate time frame. In the case of firms in which risks have been identified which could have a material bearing on the FCA meeting its statutory objectives, the FCA will also outline a remedial programme intended to address these.

2. (2)

   The FCA considers that it would generally be inappropriate for a firm to disclose its FCA risk assessment to third parties, except to those who have a need or right to be aware of it, for example external auditors. FCA risk assessments are directed towards a specific purpose - namely illustration of the risks posed by a firm to the FCA'sstatutory objectives and to enable the FCA to allocate its resources accordingly. Using a risk assessment for any other purpose has the potential to be misleading. The FCA therefore discourages firms from disclosing their assessments, unless they are required to make them public under relevant disclosure obligations.

As many firms will not have dedicated, fixed portfolio resource, the first point of contact for many issues for such firms will be handled by the FCA's Contact Centre, with the aim being that fewer issues and queries will need to be referred to the supervisors. To support all firms the FCA will also provide regional workshops and road shows to clarify its expectations on these risks and issues that are particularly important to the FCA.

While respecting each regulator's different statutory objectives and mandates, in undertaking its supervisory activity the FCA will co-ordinate and co-operate with the PRA as required and necessary in the interests of the effective and efficient supervision of regulated firms and individuals. Both regulators will coordinate with each other as required under the Act, including on the exchange of information relevant to each regulator's individual objectives. However, the FCA and PRA will act independently from one another when engaging with firms, reflecting an independent but co-ordinated regulatory approach. Maintaining effective working relationships with the PRA will be vital to achieving the FCA vision. To this end, and as required under the Act, the FCA will maintain a memorandum of understanding with the PRA which will set out how the two organisations will work together.

In order to meet the statutory objectives and address identified risks to those objectives, the FCA has a range of supervisory tools available to it, including the power to impose financial penalties.

These tools may be usefully grouped under four headings:

1. (1)

   identify – identifying instances where the UK financial system or firms are harming consumers, have the potential to do so, or where the UK financial system is working poorly and not providing sufficient benefit to consumers2;

2. (2)

   diagnose – diagnosing potential harm, including its cause, extent and potential development2;

3. (3)

   remedy – assessing the range of the FCA’s available regulatory tools and making a judgement about whether these tools can remedy or mitigate the harm cost-effectively2; and

4. (4)

   evaluate – for the FCA’s largest interventions, the FCA will test how effective these were and publish analysis after the event2.

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.

Some of these tools, for example the use of public statements to deliver messages to firms or consumers1, do not involve the FCA in direct oversight of the business of firms. In contrast, other tools do involve a direct relationship with firms. The FCA also has powers to act on its own initiative to impose or vary individual requirements on a firm (see SUP 7) and to ban or impose requirements in relation to specific financial promotions1. The FCA may also use its general rule-making powers to ban or impose requirements in relation to specific products, types of products or practices associated with a particular product or type of product. The use of the FCA's tools in its oversight of market practices, in ensuring the protection of client assets and for prudential supervision of FCA-only firms, will also contribute to the integrity and orderly operation of the financial markets.

The FCA uses a variety of tools to monitor whether a firm, once authorised, remains in compliance with regulatory requirements. These tools include (but are not limited to):

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; and

9. (9)

   use of skilled persons.

The FCA 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; and

4. (4)

   varying a firm'spermission in another way.

For further discussion of the FCA's regulatory approach, see publications on the FCA's website.