Building the New Regulator – Progress Report 2 (February
2002) and Our Approach to Performance Evaluation (January 2002)
These two documents shed some further light on
FSA’s new operating methods, and give indications as to the
areas upon which FSA is likely to focus.
FSA reports in Progress Report 2 that in
2001 it:
- Developed its strategic planning framework, setting out its
aims and objectives for the next three years;
- Established how it would work with overseas regulators;
- Developed its risk assessment framework. This is the
“Arrow approach to risk based regulation, described in the
New Regulator for a New Millennium document and
Progress Report 1, and expanded upon here.
FSA reiterates that it is concerned with risks
to its four statutory objectives which may arise from markets,
products, individual firms or externally. These are not necessarily
the same risks as from a firm’s perspective. In assessing
these risks, FSA is concerned with their potential impact and
likely probability, and FSA’s response to them will be
driven by:
- the significance of the risk to its objectives;
- the prioritisation of the issue in accordance with FSA’s
strategic objectives;
and its choice of response in relation to specific
firm or a wider sector will be driven by the principles of good
regulation - the seven matters at section 2 FSMA to which FSA must
have regard when carrying out its statutory objectives. FSA will
seek to be proactive and use its powers pre-emptively by
mitigating risks before they occur.
In Our Approach to Performance Valuation
(January 2002), FSA states that it should seek to identify the
biggest problem areas and come up with programmes to address
them. This is consistent with its shift away from routine
firm-specific regulation and towards thematic regulation. Each year
it will seek to identify and publish sufficiently important themes,
together with the specified outcomes which FSA is seeking. Current
themes include:
- The impact of demographic ageing;
- Treating customers fairly;
- With-profits business.
FSA considers that its operating framework is risk
based, with firms receiving a base level of supervisory
activity with additional activity depending upon FSA’s
assessment of the likely impact and probability of risk presented
by that firm. FSA describes the “base level of supervisory
activity for various types of firm in Appendix A of Progress
Report 2.
The 80% of firms which FSA categorises as low
impact will be subject to baseline monitoring (mainly analysis
of returns), but together with
- visits in response to information provided.
- sample visits
- visits pursuant to themes.
A high impact firm, such as a major retail
or wholesale institution, will experience what FSA describes as a
“close and continuous relationship which will include:
- a dedicated FSA relationship manager
- a close relationship with management so FSA can anticipate
risks
- annual on-site visits to assess risk, together with additional
visits to test controls, or pursuant to themes
- an individual risk assessment and risk mitigation
programme.
FSA’s risk monitoring will seek to
identify:
- Concentrations of risk;
- Trends in risk;
- Emerging risks;
and will supplement this with a watch list whereby
certain firms are reviewed monthly by FSA senior management. In
assessing risk in relation to a material business unit, a firm or a
group, FSA will use a common approach and will seek to assess
business and control risk in terms of:
- Financial failure;
- Misconduct/mismanagement;
- Consumer awareness;
- Fraud/dishonesty;
- Market abuse;
- Money laundering;
- Market quality.
FSA’s overall assessment of a firm’s
risk will be mitigated by strong controls and exacerbated by
weak controls.
In Our Approach to Performance Evaluation
FSA discusses how it will seek to produce evidence that it is
making progress towards achieving outcomes that matter. FSA
recognises that its four statutory objectives are of a very general
nature, and that a comprehensive and fully accurate evaluation of
performance is therefore not possible.
Having discussed appropriate performance measures
for a public sector body, FSA says that it will evaluate its
high level performance against stated objectives for each of
its principal aims. FSA says that it will require to:
- Establish identifiable outcomes and measures of success;
- Focus on big issues, making clear how problems are identified
and addressed;
- Produce easily understandable information.
FSA states that one of the objectives of this
exercise is to enable it to produce “stories about how we
have fixed important problems (section 4 para 1). FSA will
select the areas of performance to measured, the criteria for
determining success and the degree of publicity to be given to this
process. One unintended result of this exercise may therefore be to
encourage FSA to concentrate its activities in high profile areas
where there is likely to be significant media interest - such as
matters involving household names, obvious wrongdoing or consumer
finance - in preference to less “headline grabbing areas.
For further information please contact Simon Morris
on +44(0)20 7367 2702 or by e-mail at simon.morris@cms-cmck.com.