With the FSA set to regulate brokers, it is important to get a feel for how the organisation works. In the first of a weekly series, compliance consultancy Deloitte & Touche, explains the regulatory regime

Plans for a single regulatory regime for the financial services sector came to fruition at midnight on 30 November 2001, when the Financial Services & Markets Act 2000 came into force.

The Financial Services Authority (FSA) has its own statutory objectives against which its performance can be measured. As a consequence it has reviewed the make-up of the market overall to introduce a more risk-based approach to supervising and monitoring the firms it regulates.

In establishing a compliance environment, emphasis is placed on fundamental principles or expectations to which all regulated firms are expected to adhere.

Its philosophy is that regulation should be in the interests of the market, the consumer and the firms.

The regime is designed not to be intrusive - supportive of the view that it is the management's role to run its own business. However, to protect consumers it is essential that firms can demonstrate that they meet the standards of a regulated firm.

In reviewing an individual firm, the FSA considers a firm's business in a similar way to how firms may vet a potential business partner.

  • What is the company and what is the strength, depth, experience and competency of its senior management?

  • What are the systems and controls like? Does it get the right balance or accuracy of management information to manage the business?

  • Is it involved in any riskier areas of the business that might give rise to problems, if it has not controlled its exposure?

  • Does it have enough financial capital, given the markets in which it operates?

  • Is it of such a size or exposure profile that if anything happened to it, it would threaten defined objectives?

    No matter whether the FSA is looking to grant approval to new entrants in the market or to adjust existing regulated firms into the future monitoring process, all firms are subject to this supervisory review.

    Once completed, the firm will have been graded between A to D based on the balance of answers the FSA supervisory team generates.

    Grade A firms will experience a very close and regular monitoring review with more resource and more attention focused on it. Unsurprisingly this grade is likely to be limited in use and applies to only those firms whose market size and profile is such that they would threaten the FSA's own performance against its objectives.

    Grade D, which is likely to apply to the majority of regulated firms, should mean for compliant trouble-free firms, limited personal contact, remote monitoring based on management information and general inquiries for data to produce market-wide research on hot topics of interest.

    Regardless of the risk assessment, the regulator will expect firms to produce a combination of private and public information from their existing management information systems.

    This information will then enable the FSA to check that a firm is being controlled and operated effectively and that there are sufficient capital resources to protect consumers in the event of problems.

    Most insurance intermediaries may have to go through a similar authorisation and risk assessment process within the next few years and, as experience has shown from the preparation for N2, insurance intermediaries should begin to prepare for change as soon as possible.

    The FSA has targeted the insurance industry for radical reform and close supervision over the next few years and first impressions may help greatly in smoothing the transition to a statutory regulator.

  • Topics