The practical aspects of living with the regulatory changes introduced when the FSA received its full powers in December last year are slowly becoming apparent
Government legislation covering the financial services industry became fully operational on 1 December 2001. This was also the date when the Financial Services Authority (FSA) received its full powers, making it the sole UK regulator of the industry for the first time.
This date was eagerly awaited by the FSA and some 10,000 authorised firms as representing the end of a long period of preparation and the beginning of a new UK regulatory structure.
By all accounts, it was rather uneventful. This was largely due to the excellent communication from the FSA to the financial services industry as to what to expect and prepare for, as well as a desire on the part of the majority of the industry to resolve any differences in a co-operative and positive way.
As with all beginnings, especially one as large as the introduction of a universal regulator, there is still much to learn about the practical aspects of living with the changes and making them part of the ongoing business process.
The FSA is conscious of its responsibility to provide as much clarity as possible and help the industry gain confidence it has done what is necessary to meet the regulators' requirements.
Many of these requirements are little more than a re-statement of previous regulators' rules and guidance. Firms are familiar with them and have not needed to do a great deal to become compliant. That is the good news.
However, there are a number of major areas where new rules and requirements introduce different approaches to existing practices and entirely new concepts that need to adopted. That is the bad news.
So, has your firm and management team identified all you are expected to do?
The first of these changes is the move from nine separate regulators to only one. This eliminates the need for separate authorisations from separate regulators that were previously necessary to reflect their closely defined scope.
Single firms that had multiple authorisations have already received FSA authorisation combining these. Groups of firms may want to consider if there are any advantages in reducing the number of authorised firms they have as separate legal entities through concentrating regulated activities in a single or reduced number of firms.
There may also be opportunities to simplify any passporting of branches or services across Europe.
A further concept addressing how the FSA supervises firms has also been introduced. The regulator announced its risk-based supervision regime some time ago and has been busy risk-rating firms through application of its model across the board.
Recent announcements clearly said there will be a differentiation between firms with the same degree of risk in their operation but who differ in the degree to which they can demonstrate control over this risk. Poor control will result in heavier supervision that may limit flexibility and require more frequent and detailed reporting requirements.
Another change is the introduction of the primary tools the FSA will use to track how well firms are managing risk. Specifically, the senior management responsibility, systems and controls rules (SYSC) set out requirements for firms to conduct internal risk reviews of business processes and establish well documented procedures and systems to manage and control those identified.
This will involve the senior management team, from the senior executive officer down, in a formal and personal way. Specific responsibilities for risk management and control must be apportioned to individuals by the SEO.
He or she must also set out what their requirements and expectations are of that individual, together with the frequency and detail of reports to be delivered to the firm's governing body on developments in controlling risks.
This top-down approach affects senior management in line and support functions. It also provides firms with considerable flexibility in developing risk management programmes and procedures that are appropriate for them.
It makes it clear firms will need to be aware of, and include, industry best practice in their business processes to be able to demonstrate good risk management to the FSA. This will need to be done through robust documentation of procedures and systems, detailed records of appropriate training delivered to those who are affected, reviews of how they are tested and updated and reports to the firm's governing body of activity and progress in controlling risk.
Failure in this area involving either an inability to demonstrate the existence of a robust risk control process or a specific event of risk control failure could result in a poor evaluation that may, in turn, mean introduction of a more robust supervision programme.
It could also result in the commencement of enforcement action against one or more individuals who had been apportioned responsibility for establishing procedures or controlling specific risks. This is a very powerful tool for the FSA. Senior management teams must devote considerable effort to align their firms with the requirements in this area.
The FSA has also introduced widely applicable rules involving the requirement for prior approval of all individuals who will be holding any of 27 controlled functions ' the approved person regime.
These range from directors and others who can exercise significant influence over the affairs of the firm to those who provide advice to consumers on the merits of buying a specific investment.
A standard has been established for deciding if an individual is fit and proper to hold a specific position and detailed guidance is provided about how certain functions should be carried out. Individuals proposed to hold any of these controlled functions must be approved by the FSA prior to actually taking up the position.
This is linked to a further development, a demanding set of requirements in the training and competency area. Firms are faced with a general requirement to employ only competent staff, evaluate them on an ongoing basis and make sure they remain competent at all times. This applies to all staff regardless of their position within the firm or their having already successfully met examination requirements.
Firms are also faced with specific requirements for many of their staff to achieve examination passes in professional disciplines to take up certain functions or, in some cases, to remain in those positions. These individuals must also be able to demonstrate that they continue their training at all times.
N2 has arrived, it is no longer an event to be anticipated but the start of a new regulatory era. Is your firm and management team sufficiently aware of what the requirements are and committed to meeting them as a key part of your business process? If not, you may still have a lot to do.
Jim Fleming is director of Cstarr, a specialist consultancy to the financial services industry.
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