Background

The FSA uses a number of tools to detect and address non-compliance by firms including breaches by firms in their duty of care towards either their customers (e.g. through misselling) or the regulator (e.g. non-compliant internal controls). However, detection of this behaviour amongst the large population of small firms (there are 18,000 small retail firms) presents different challenges to how we detect non-compliant behaviour amongst relationship managed firms.


The FSA seeks to be pro-active in minimising the risk of non-compliant behaviour, and to do so is looking to enhance and develop its strategy. This will include further work to identify those firms most at risk of acting in a non-complaint way, and minimising any incentives small firms may have to be non-complaint

Objective

The objectives of the research project are to:

  • Provide information on which characteristics or variables help identify small firms that are most at risk of being non-compliant;and
  • Explore the various tools available to the FSA to help identify the mix of communication, supervision and enforcement efforts that will most effectively deter small firms from acting in a non-compliant way.

This project supports the FSA’s efforts towards More Principles Based Regulation. It does this by identifying firms most at risk of non-compliant behaviour and identifying appropriate incentives for firms not to misbehave without recourse to prescriptive rules.

Method

This research will involve a mix of theoretical and empirical work to explore the objectives mentioned above. The theoretical development should help us to better understand the motives of firms and how various incentives might be applied to deter non-compliant behaviour. Some empirical work will be necessary to improve our understanding, apply the theory to the FSA’s processes and advise on the impact of the available mix of communication, supervision and enforcement.


As this research will inform the FSA’s regulation of small firms, the project will seek the knowledge and collaboration of a number of divisions from around the FSA, in particular the Small Firms Division.