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CPA Audit

FCA's New Classification for Firms (13/05)

20 March 2013

Conduct and Prudential classification

Introduction

The Financial Conduct Authority (the FCA) has started to contact Firms directly to confirm their new conduct and prudential classification. A factsheet has also been enclosed in the FCA letter, explaining its three-pillar supervision approach.

The Three Pillar Approach

The three-pillar model is designed to support a judgment based and pre-emptive approach focusing on delivering the FCA’s statutory objectives.

  • Pillar 1. Proactive Firm Supervision – this is to identify poor conduct behaviors in relation to fair treatment of customers, risks to market integrity and effective competition.
  • Pillar 2. Event-Driven Work – this is to deal with the issues that are emerging or have happened and are unforeseen in their nature.
  • Pillar 3. Issues and Products – key conduct priorities at the issue and product level.

The FCA will be focusing on a small number of “prudentially critical” firms, to minimise the impact of failure on consumers and market participants.

Conduct classification

Firms will be categorised into one of the four conduct supervision categories: C1, C2, C3 or C4, according to their potential impact on FCA objectives and their number of retail clients.  C1 firms are regarded as the most risky companies while C4 firms are regarded as the least risky ones.

C1 and C2 firms will have a nominated supervisor. The FCA will write to firms again in April 2013 to confirm the details of their allocated supervisor, or if a firm is no longer to have a dedicated supervisor.  Proactive supervision for C1 firms will be on a 1 year cycle and C2 firms will be on a 2 year cycle. At the end of each supervision cycle, a firm will receive a letter setting out the FCA’s evaluation on the risks it poses to FCA’s objectives and the supervision work programme for the next period.

The vast majority of firms will be C3 and C4 firms and classed as ‘flexible portfolio’. They will be supervised by a team of sector specialists and not have a nominated supervisor – just as the FSA currently supervises smaller firms. The firm-specific assessment for C3 firms will be on a 4 year cycle. The C4 firms will also be subject to a “touch point” once during a 4 year cycle but this will be a lighter assessment than for C3 firms. The assessment can take the form of a roadshow, an interview, a telephone call, an online assessment, or a combination of these.

Prudential classification

Prudential classification applies to firms for which the FCA is their prudential regulator. It has four categories: P1, P2, P3 and P4. P1 firms are regarded by the FCA as most critical whilst P4 firms are regarded as less critical.

Disorderly failure of P1 and P2 Firms would have a significant impact on the market. The difference between the P1 and P2 is that the P2 firms have a smaller client asset and money base or an orderly wind-down can be achieved. Periodic assessment of capital requirements will be carried out by the FCA on both P1 and P2 firms.

For P1 firms, there will be a full review of Internal Capital Adequacy Assessment Processes (ICAAP) and Individual Liquidity Adequacy Assessments (ILAA) for MiFID firms, if also subject to the CRD. The FCA will require a satisfactory wind-down plan from each firm. The FCA only undertakes a review of ICAAPs and ILAAs for MiFID investment firms who are subject to the CRD.  There will be very limited going-concern supervision for P2 firms.

The supervisory focus will be on making sure the wind-down plan is achievable and that the firm holds a minimum level of financial resources to fund an orderly wind-down.

Failure of a P3 firm is deemed unlikely to have significant impact. For P3 firms, the FCA will be monitoring firms against minimum requirements and only stepping up supervision when a firm is close to failure. P4 will be a special group requiring a differentiated prudential supervision due to their specific nature or circumstances, or firms in administration or insolvency.

If your firm is also regulated by the Prudential Regulation Authority (the PRA), the prudential requirements discussed here are only from the FCA. There will be a separate letter from the PRA’s prudential requirements for dual-regulated firms.

As always if you have queries please contact any member of CPA compliance team.

 

 

 

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