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ENSURING FIRMS CONTINUE TO MEET OUR STANDARDS
Like retail firms, however, they will be subject to an assessment if information indicates that their risk profile has significantly increased. We are considering whether there should be some form of contact on a four- year basis through an online assessment. These firms will have one designated senior contact within the relevant supervision team.
Prudential supervision of FCA-only firms
Although the PRA will have prudential responsibility for all deposit takers, insurers and significant investment firms, we will have prudential responsibility for other sectors across the financial services industry.
Our general approach to prudential supervision will be based on managing failure when it happens rather than focusing on reducing its probability – this is because isolated failures of FCA-only firms would not generally present a risk to the integrity of the financial system. With the exception of a small number of prudentially critical firms, where we will continue to actively work to reduce their probability of failure, our focus will be on reducing the impact on customers and the integrity of the financial system of firms failing or being under financial strain. This is consistent with the PRA’s approach to firm failure – where we concentrate on mitigating the impact of failure on consumers and the PRA concentrates on mitigating the impact of failure on the stability of the financial system.
Our focus will be on ensuring that client assets are protected and a firm can be run down without adversely affecting consumers. However, we recognise that pre- failure, firms under financial strain can change their behaviour towards customers. We will identify instances where firms that are failing could cause further but avoidable harm to their customers, and will consider these as part of the event-driven process for possible action.
The type of supervision depends on the nature of the firm:
Prudentially critical firms (CP1), are firms where a disorderly failure would have a significant impact on the market in which they operate (for example, because a particular market is highly concentrated, so that a disorderly failure of one player could not easily be assimilated by the others, and/ or where there are significant client asset and money holdings).
Prudentially significant firms (CP2), are firms where a disorderly failure would have a significant impact on the functioning of the market in which they operate, but there is a smaller client asset and money base or an orderly wind-down can be achieved.
Prudentially insignificant firms (CP3), are firms where failure, even if disorderly, is unlikely to have significant impact.
Making this approach work involves undertaking a form of prudential analysis to identify firms that are under financial strain.
Our focus will be on reducing the impact on customers and the integrity of the financial system of firms failing or being under financial strain.
For CP1 firms, there will be a full review of Internal Capital Adequacy Assessment Processes (ICAAP) and Individual Liquidity Adequacy Assessments (ILAA), where applicable, if they are Markets in Financial Instruments Directive (MiFID) investment firms subject to the Capital Requirements Directive (CRD); and a review of firms’ risk management practices. We will want to set Individual Capital Guidance at the minimum of the going-concern requirement or the orderly wind-down requirement – whichever is the greater.
TO
THE
Foreword by John Griffith-Jones
Introduction by Martin Wheatley: Our vision for the Financial Conduct Authority
Chapter 1: The creation of the FCA: Spotlight on some of our new powers
Chapter 2: Protecting the perimeter
Chapter 3: Ensuring firms continue to meet our standards
Click HERE to give us your feedback on this Chapter
Chapter 4: Taking action against firms that do not meet our standards
Chapter 5: Building our understanding of the markets
Chapter 6: Maintaining effective relationships
Chapter 7: Accountability, transparency and measuring our success
Annex A: Specific questions for consultation
TO
THE
Foreword by John Griffith-Jones
Introduction by Martin Wheatley: Our vision for the Financial Conduct Authority
Chapter 1: The creation of the FCA: Spotlight on some of our new powers
Chapter 2: Protecting the perimeter
Chapter 3: Ensuring firms continue to meet our standards
Click HERE to give us your feedback on this Chapter
Chapter 4: Taking action against firms that do not meet our standards
Chapter 5: Building our understanding of the markets
Chapter 6: Maintaining effective relationships
Chapter 7: Accountability, transparency and measuring our success
Annex A: Specific questions for consultation