BUILDING OUR UNDERSTANDING OF THE MARKETS
Our risk-based approach
We will use our knowledge of risks to consumers and in financial markets to inform the work that we do.
Like other organisations, we must decide how to apply our resources to do our job in the most effective and efficient way.
The main way we can achieve this is by having a risk-based approach. This means we will make decisions and take action based on the risks to us meeting our objectives. The FCA will not be able to prevent or control everything that causes harm to consumers or financial markets. Besides market failures, there may be other causes of detriment, which public authorities cannot prevent or mitigate. Unforeseen problems, such as those in the global economy can impose large losses on even long-term investors in shares.
Market failures, especially information problems and consumer errors, are widespread in retail financial markets and have been persistent. If we tried to address all the symptoms rather than the root causes of such failures, the cost would be prohibitive and the approach required could stifle innovation and competition. This could in turn lead to greater harm, since competition delivers to consumers the choice of products they really want at the lowest achievable price. This is why the regulatory framework includes the FCA’s competition objective and duty, as well as the ‘safety nets’ of the Financial Ombudsman Service and the Financial Services Compensation Scheme, which enable consumers to get redress when a firm has not treated them fairly, or has gone bust.
We will assess risk in relation to our legal objectives and duties, and prioritise action where we believe there is the greatest risk to achieving those objectives. This assessment has three stages:
1. measuring the risk of or actual market failure;
2. prioritising the risk in relation to other issues; and
3.designing the right regulatory strategy.
For the most significant issues, we will be able to prioritise resources and reallocate them between issues or business areas as necessary.
Decision making and resource allocation
Our risk-based decisions will be tailored to each area of the FCA, and made within a strategic risk framework. To create this framework, we will develop a way of comparing and, where possible, quantifying risks within and across all of the areas we cover. The framework will enable us to agree both the activities that meet our legal responsibilities, and the additional work that allows us to identify and deal with risks to our objectives.
…we will make decisions and take action based on the risks to us meeting our objectives.
Our responsibilities cover a wide range of firms, from global financial groups to sole traders, and an equally wide range of financial activities, services and products. We will not use the same approach in each situation, and so our decisions will come down to our staff using their judgement. We want to assess risks in a standardised way to ensure these judgements are based on shared principles, and will build a model to facilitate this. This will help ensure we consistently prioritise the most important issues.
When we conduct our annual internal planning our resources will be allocated between different parts of the organisation, for example authorisations and enforcement; and different sectors, for example banking and asset management. This allocation will be based on our planned regulatory activities and risk outlook for the year ahead. If the environment changes significantly, we will reprioritise during the year.
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