BUILDING OUR UNDERSTANDING OF THE MARKETS
How this will work throughout the FCA
By bringing together our information- gathering, analysis, research and policy making into one place, we aim to make sure that we are in a position to make timely and effective interventions when we identify risks. The types of response we make could combine policy, supervision, authorisations or enforcement action.
For example, when we authorise a firm or an individual, or vary a permission, there are statutory tests that set out what we will have to consider when making a decision. We will not be able to apply a different legal test, but we can decide how much resource to use to decide whether the test is met. To do this, we will consider the risk profile of the firm and a range of factors that dictate the importance of the decision; one of these will probably be the number and type of customers potentially affected by the transaction.
By bringing together our information-gathering, analysis, research and policy making into one place, we aim to make sure that we are in a position to make timely and effective interventions when we identify risks.
Also, as set out in Chapter 3, regular supervision risk assessments will take place across most authorised firms. The frequency and intensity of these are determined by the firm’s size and its potential impact on our objectives. There are three separate but related prioritisation processes within supervision: the Firm Systematic Framework; issues and product work; and event-driven work. The first and second of these are forward-looking, while the third is, by its nature, reactive. As necessary, resources will be moved between sectors and between these three types of work.
The link between high-severity incidents and regulatory performance
We are also considering how previous conduct issues can help us evaluate our overall success. This evaluation will help us decide when we need to provide a formal report to the Treasury.(17)
It is widely agreed that a problem the size of PPI should not be allowed to recur. Consequently, the FSA Board decided that it would have zero tolerance of absolute loss to retail consumers in excess of £250m and that smaller but still significant total losses should not occur more frequently than once every five years.
It is clear that the Government and Parliament, as well as other stakeholders, believe this figure of £250m is too high for the FCA. Consequently, we aim to prevent problems occurring by being more forward-looking and intervening earlier. We will also want to focus our efforts, where there are choices to be made, on protecting more vulnerable consumers.
An example of what this could mean in practice is in the diagram on page 44. This sets out how the PPI issue developed over a number of years, in terms of the number of customers affected (incidence) and the amount of harm suffered (severity).
We will aim to prevent any issue ending up in the red zone, which represents many customers and high amounts of harm. We will also want issues in the yellow or orange zones to be exceptional (so no more than once every two years in the yellow zone and no more than once every five years in the orange zone).
As a result, most action relating to an issue we identify and consider likely to grow will need to be carried out very early – in the diagram this will be in the green zones, most likely those with a dotted pattern.
17 See Chapter 7 for more information on when we will have to make these reports.
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