Recommendation 2 of the Enforcement Process Review (EPR) states:

'The FSA should refine and communicate its enforcement approach for medium-sized and smaller firms, to complement its approaches for the larger and for the smallest firms'.

The EPR makes clear that, as a risk-based regulator, we have to make difficult choices about how we deploy our enforcement resource, as with other resources. It is a logical consequence of our risk-based approach that more supervision resource will be devoted to supervision priorities and, within this framework, to the larger firms and groups. This in turn makes it more likely that we will identify rule breaches in these priority areas, and that relatively more of these will be within the larger firms and groups.

Table 1 at paragraph 4.10 of the EPR shows that most actions have, since N2 (1 December 2001, when we got our powers under the Financial Services and Markets Act), involved higher impact firms. The Enforcement Division also supports the supervision priorities of our Small Firms Division, which include, in particular, cases where firms no longer meet threshold conditions for authorisation. This statement clarifies our approach to enforcement for medium-sized firms. Here, we define medium-sized firms as those with an FSA impact rating of 'Medium High' or 'Medium Low' as set out in table 1 of the EPR

Our Business Plan for 06/07 sets out our plans for the coming year and makes clear we will continue to adopt a risk-based approach to enforcement. We will therefore establish a much closer and more explicit alignment between Enforcement and the relevant supervision areas. This means that the FSA supervision Business Units will be key in determining at a strategic level how enforcement resource should be allocated. This analysis will consider which areas of concern will benefit most from the use of enforcement tools. Inevitably, this will mean we may need to make some difficult choices between cases in different priority areas and cases in a priority area against a non-priority area. In considering any potential referral, we will also have to assess whether the wider Enforcement Referral Criteria have been met.

Accordingly, we will allocate our available enforcement resource to support key strategic supervision priorities across firms of all sizes. However, we anticipate that the outcome of the Business Units strategic analysis of the most effective use of enforcement resource may result in an increased focus on issues presented by medium-sized firms. As a result, we expect a potential increase in the number of referrals of medium-sized firms, provided the relevant referral criteria are met.

In relation to thematic work we will continue to select firms to participate in thematic work using the criteria in paragraph 4.14 of the EPR. So all thematic projects will, for the most part, include some medium-sized firms. No thematic project starts with the presumption that firms will be referred to Enforcement, but if we discover issues we will consider all such firms, regardless of size, for referral to Enforcement in the usual way and against the referral criteria.

In considering whether any referral to Enforcement is appropriate we will continue to consider the use of alternative tools and plan to publish on our website examples of the types of responses by firms which may obviate the need for enforcement action.

However, it does not follow that an increase in the number of referrals of medium-sized firms will necessarily lead to a reduction in the number of referrals of large and small firms. This is due to the variable time taken to complete an Enforcement case, the phasing of work over the year, the emergence of new priority areas and increased efficiencies in the processing of Enforcement cases. Overall, any allocation of enforcement resource will need to be considered in the light of the overall allocation of resource at any given point and take account of competing and new priorities. We will continue to proactively review the allocation of Enforcement resource to supervision priorities.