SUP 1
The FSA's
approach to supervision
SUP 1.1
Application and purpose
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Application
SUP 1.1.1
See Notes
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Purpose
SUP 1.1.2
See Notes
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SUP 1.1.3
See Notes
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) maintaining confidence in the
financial system;
(2) promoting public understanding of the
financial system;
(3) securing the appropriate degree of protection
for consumers;
and
(4) reducing the extent to which it is possible
for a business carried on by a regulated person,
or in contravention of the general
prohibition, to be used for a purpose connected with financial
crime.
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SUP 1.1.4
See Notes
In designing its approach to supervision,
the FSA has
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 firm (section 2(3)(b)
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. The FSA 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 2(3)(c)
of the Act).
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SUP 1.2
Introduction
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SUP 1.2.1
See Notes
(1) The Authorisation manual (AUTH), the Supervision
manual (SUP), the Enforcement
manual (ENF) and the Decision making manual (DEC) form the regulatory
processes part of the Handbook.
(2)
AUTH sets
out the relationships between the FSA and
applicants for Part IV
permission and persons wishing
to exercise EEA rights, Treaty rights or UCITS Directive rights.
(3)
SUP sets
out the relationship between the FSA and authorised persons (referred
to in the Handbook as firms). As a general rule,
material that is of continuing relevance after authorisation is in SUP.
(4)
ENF describes
the FSA's enforcement
powers under the Act and
sets out its policies for using those powers.
(5)
DEC is
principally concerned with, and sets out, the FSA's decision making procedures for decisions
that involve the giving of statutory
notices.
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SUP 1.2.2
See Notes
For a firm which undertakes business internationally
(or is part of a group which
does), the FSA 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 FSA will usually seek
to cooperate with relevant overseas
regulators, including exchanging information on the firm. Different arrangements
apply for an incoming EEA
firm, an incoming
Treaty firm and a UCITS
qualifier. The arrangements applying for an incoming EEA firm and an incoming Treaty firm are addressed in SYSC
App 1. For UCITS
qualifiers see also COLLG, and CIS
2.3, CIS 16, and CIS 17.
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SUP 1.2.3
See Notes
The FSA continues
to develop the risk assessment approach set out in this chapter. The approach
will not be introduced for all firms at commencement. For those firms where the approach
is not introduced at commencement,
the FSA continues
to operate the risk assessment approach of the firm's previous
regulator.
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SUP 1.3
The FSA's risk based approach to supervision
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Purpose
SUP 1.3.1
See Notes
The purpose of taking a risk-based approach
to supervision is to focus the FSA's resources
on the mitigation of risks to the 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 firms is based on the
extent to which they pose risks to the FSA meeting
the regulatory objectives.
This extent encompasses both the impact of such risks were they to crystallise
and the probability of their doing so. The probability of risks crystallising
depends on the inherent risks run by firms,
the environment within which they operate and the internal systems and controls
designed to mitigate such risks. This approach permits a matching of the intensity
of the FSA's supervisory
effort with the degree of risk posed by firms to
meeting the regulatory
objectives.
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Impact and probability assessment
SUP 1.3.2
See Notes
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SUP 1.3.3
See Notes
The impact of a firm is assessed by reference to a range
of factors derived from the regulatory
objectives, including:
(1) the degree to which risks related to
the firm,
were they to materialise, would damage market confidence;
(2) the extent to which the firm may pose risks to
the achievement of the objective of promoting public understanding;
(3) the extent to which consumers may be adversely affected either
directly or indirectly by the firm as
a result of prudential failure, misconduct, market malfunction, market manipulation
or the need to contribute to the financial reconstitution of compensation
schemes;
(4) the incidence and materiality of any financial crime which
may be perpetrated through or by the firm.
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SUP 1.3.4
See Notes
The probability of a firm posing a risk to meeting the regulatory objectives is,
where applicable, assessed in terms of "risk groups". These are discrete sources
of risks to meeting the regulatory
objectives which arise from:
(1) the firm's strategy;
(2) the firm's business
risk: those risks (such as credit, market and operational risk) which are
inherent in the business;
(3) the financial soundness of the firm;
(5) the internal systems and controls and
the compliance culture of the firm;
and
(6) the organisation of the firm and the role played
by its governing body, management and staff in effectively mitigating risk.
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SUP 1.3.5
See Notes
The impact and probability assessments
are combined to give an overall judgment as to the firm's priority for the FSA and therefore the nature of the relationship
which the FSA will
seek to have with the firm (see
'A new regulator for the new millennium' and 'Building the new regulator,
Progress report 1').
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SUP 1.3.6
See Notes
In addition to assessing the firm in terms of these
impact and probability factors, the FSA takes
into account three further factors which may affect the choice of supervisory
approach and activities:
(1) the level of confidence in the information
on which the risk assessment is based;
(2) the quality of the home regulatory regime
(for firms with
their head office overseas); and
(3) any anticipated material change in impact
and probability factors.
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The scope of the risk assessment process for firms
SUP 1.3.7
See Notes
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SUP 1.3.8
See Notes
The main steps in the risk assessment process are:
(1) preliminary assessment of a firm's potential impact on the regulatory objectives;
(2) probability assessment - the level of detail depends on the impact rating and the complexity of the firm (in the case of low impact firms, the firm-specific probability analysis will be minimal);
(3) for a sample of firms, validation panel for peer review of risk grading and resource allocation;
(4) letter to firm regarding risk assessment and any remedial actions (see SUP 1.3.10 G); and
(5) continuing review of risk assessment as necessary.
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SUP 1.3.9
See Notes
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SUP 1.3.10
See Notes
The FSA intends
to communicate the outcomes of its risk assessment to the firm. In the case of firms in which risks have been identified
which could have a material bearing on the FSA meeting the regulatory objectives, the FSA will also outline a programme intended
to address these. The FSA considers
that it would generally be inappropriate for the firm to disclose the FSA risk assessment to third parties, except
those who have a right to be aware of it, for example external auditors. The
assessment is directed towards a very specific purpose - to illustrate the
risk posed by the firm to
the regulatory objectives and
to enable the FSA to
allocate its resources accordingly. Using it for any other purpose might well
be misleading. The FSA therefore
discourages firms from
disclosing their assessments.
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The nature of the FSA's relationship with firms
SUP 1.3.11
See Notes
The FSA's relationship with firms has five main elements:
(1) Determining satisfaction of the threshold conditions: in order to carry on regulated activities, a firm must demonstrate that it can satisfy, initially and on a continuing basis, the threshold conditions (see COND) (for example, the need to maintain adequate resources).
(2) Baseline monitoring which is designed to ensure that firms comply, on a continuing basis, with the regulatory requirements which apply to them (see SUP 1.1.2 G): the FSA collects and analyses data supplied by firms (see for example SUP 16) and by third parties such as the Financial Ombudsman Service Limited, consumers, and by other regulators.
(3) Sectoral reviews and thematic work which will be used, for example, to validate information provided by a firm and to collect up to date information on a particular sector, in order to assess whether a firm meets required standards: thematic work is carried out to assess the risks posed by a particular issue (rather than by a sector or group of firms). The issues selected for such work are likely to be broader and proportionately more significant to the FSA's regulatory objectives.
(4) Programmes designed to mitigate specific risks in individual firms these programmes depend on the firm's priority for the FSA (see SUP 1.3.5 G).
(5) Work undertaken after particular risks have escalated or crystallised: once the FSA has identified an issue, it will need to use its regulatory judgment to determine how it should respond, if at all.
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SUP 1.3.12
See Notes
The exact mixture of elements will thus
vary with the firm's risk
categorisation. Moreover, the elements being used at a particular time will
depend on the firm's circumstances
- for example, whether it is applying for permission to conduct other regulated activities,
or is being investigated by the FSA.
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SUP 1.4
Tools of supervision
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SUP 1.4.1
See Notes
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.
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SUP 1.4.2
See Notes
The FSA classifies
these tools under four headings:
(1) diagnostic: designed to identify, assess
and measure risks;
(2) monitoring: to track the development
of identified risks, wherever these arise;
(3) preventative: to limit or reduce identified
risks and so prevent them crystallising or increasing; and
(4) remedial: to respond to risks when they
have crystallised.
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SUP 1.4.3
See Notes
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.
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SUP 1.4.4
See Notes
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).
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SUP 1.4.5
See Notes
The FSA uses
a variety of tools to monitor whether a firm,
once authorised,
remains in compliance with regulatory requirements. These tools include:
(1) desk-based reviews;
(2) liaison with other agencies or regulators;
(3) meetings with management and other representatives
of a firm;
(4) on-site inspections;
(5) reviews and analysis of periodic returns
and notifications;
(6) reviews of past business;
(7) transaction monitoring;
(8) use of auditors;
(9) use of skilled persons.
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SUP 1.4.6
See Notes
The FSA also
uses a variety of tools to address specific risks identified in firms. These tools include:
(1) making recommendations for preventative
or remedial action;
(3) imposing individual requirements;
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SUP 1.4.7
See Notes
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SUP 1.5
Lead supervision
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Application
SUP 1.5.1
See Notes
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Purpose
SUP 1.5.2
See Notes
The FSA has
developed arrangements for lead supervision in order to achieve more efficient
and more effective supervision of firms and
their groups.
Lead supervision is designed to deliver a coordinated approach to the supervision
of groups with
more than one supervisory contact at the FSA,
assisting the FSA to
monitor them effectively and respond to the risks that arise.
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Process
SUP 1.5.3
See Notes
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SUP 1.5.4
See Notes
The lead supervisor has three key responsibilities:
(1) to produce an overall assessment of the group: this comprises
an assessment of the strengths and weaknesses of the business of the group and each of the firms within a group and a risk assessment
of the group as
a whole;
(2) to coordinate the supervision programme:
based on the overall assessment, the coordinated supervision programme is
a single, risk-based supervision plan for the whole group for a specified period; and
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