How we supervise firms
'Supervision' is the term we use to describe our day-to-day regulatory relationship with authorised firms. It is our process of monitoring and regulating firms to ensure they are complying with the regulatory requirements.
As a general principle, we supervise firms according to the risks they present to our statutory objectives. We assess risks in terms of their impact (the scale of the effect these risks will have on consumers and the market if they were to happen) and probability (the likelihood of the particular issue occurring).
The nature and extent of our supervisory relationship with an individual firm depends on how much of a risk we consider it could pose to our statutory objectives. The framework we use to assess that risk is called 'ARROW' – the Advanced Risk-Responsive Operating frameWork. We introduced an improved framework (ARROW II) in 2006.
Within ARROW II, there are two basic approaches we use to supervise firms:
- the ARROW Firms approach – used when assessing risks in individual firms (we also call this 'vertical' supervision); and
- the ARROW Themes approach – used when assessing cross-cutting risks (i.e. those involving several firms or relating to the market as a whole (we call this 'horizontal' work).
We choose one of the other of these approaches, or a mixture of the two, to deal with risks in the most efficient and effective way.
The base level of supervisory intensity depends on impact and probability scores we assign to a firm (or group of firms) which, in turn, helps us to determine the nature of the relationship that we have with a particular firm.
Medium and high-impact firms
In relation to medium and high-impact firms, we coordinate our work through a relationship manager, who carries out a regular risk assessment (on a cycle of one to four years) and determines a risk mitigation programme proportionate to the risks identified. The precise volume and type of work we undertake will depend on the size and riskiness of the firm concerned.
We also apply baseline monitoring activities (as this is undertaken for all firms regardless of their impact scores). This involves analysing a firm's financial and other returns, and checking compliance with notification requirements. Breaches and other indicators of risk may be followed up by the supervisory team.
For high impact firms, we apply a closer monitoring regime (we call this 'close and continuous' work). This is essentially a planned schedule of ARROW visits to the firm throughout the regulatory period. This allows the supervisory team to meet the firm's senior management and control functions regularly.
Where possible, we will centralise our supervision of all of the firms within a group in a single team. When appropriate (for example, if we believe the group has an integrated management and/or control structure) we will produce a combined ARROW risk assessment and risk mitigation programme covering all the firms in a group.
Low-impact firms
If a firm is assessed as low impact, it does not have a specific risk assessment or risk mitigation programme. These firms are monitored by a combination of baseline monitoring, action in response to risks identified by this information, thematic exercises to monitor compliance standards in a sector and work as part of sector-wide reviews.
We believe most small firms pose a low risk to our objectives individually. As a result, small firms have a lighter-touch supervisory relationship with us. In practice this means, unlike the larger firms we regulate, they do not have regular visits and are usually required to send regulatory reports only twice a year. Small firms are given the Firm Contact Centre as a primary contact rather than a relationship manager.
However, we believe small firms do pose a risk to our objectives collectively. To regulate over 20,000 small firms we have adapted our risk-based supervisory approach to meet these specific sets of circumstances. We collect information from a variety of sources (e.g. RMAR regulatory returns); analyse the data to identify collective risks; where necessary we investigate the matter further (e.g. questionnaires or targeted firm visits); and we then communicate the results of the research to the industry (e.g. on our website and through the media and national events such as roadshows).
We aim to change the behaviour of small firms in a way that improves standards across the industry. By working together, the FSA and small firms can improve consumer confidence in financial advice.
Small firms can stay up to date with the latest news from on our dedicated small firms pages.
