IMPORTANT CHANGES TO THE WAY THAT YOU WILL BE SUPERVISED
A SECOND Heads Up for Clients by David
Payne, Mortgagecoply.com ltd
You may have had, or will be receiving in the near future, a
letter from the FSA relating to what are termed new Prudential and new Conduct
Classifications for firms that will be introduced for firms one the FCA is in
place. You should have received such a letter or email by the end of March. If
you have not received such a letter by
early April ( the FSA instructs) you should contact the Firms Contact Centre
and advise them that you have not
received your new Prudential and Conduct Classification letter. The
Firms’ Contact Centre telephone number is unchanged as 0845 606 9966.
Most of you should
have been given a Prudential Classification of P3 and a Conduct Classification
of C4 and this compliance note is aimed at those classifications. If you have
received a different classification then please let me know and I will advise
you on what it means for your firm.
Prudential Classification
The Prudential
classification sets out how much of a risk your firm is as far as the FCA is
concerned. Their approach is to focus on the impact of failure (in the firm) on
consumers and the market and firms have been rated on their likely impact. A
small broker firm dealing with less than a few hundred customers is going to
have less impact on both customer base
and the market if , for example, it goes into liquidation or if it deliberately
and persistently miss-sells a product than for example, the Northern Rock or
any other lenders failing their capital adequacy ( as happened with Northern
Rock for example ) or lending irresponsibly
on high income multiples without evidence of income to disadvantaged
customers such e.g. RTB or adverse ( as happened pretty much across the market
a few years back). We have all felt the repercussions of The Rock’s failure but
who has heard about the failure of John Smith Mortgage Broker in Anytown ,
Somewhereshire other than friends and family and maybe some of his customers?
The Rock will be a P1 – highest category of risk (probably along with most
other lenders) and John Smith, if he were still trading would be a P3. (P4 is
for firms that require specialist approach for example firms in insolvency or
administration or firms with ‘special supervisory regimes’. These are unlikely
to be any of those of you reading this document.
It is likely that
the main input to this means of review for P3 firms will be the RMAR through
GABRIEL, or any future returns as amended – we already know that they will be modified
by 26th April 2014 to reflect the MMR. Didn’t know that already?
Watch out for future compliance updates.
The FSA states that
the FCA will rely upon firms own assessment of their prudential position (
through the returns for example) and will look for inconsistency or issues
arising from these ( e.g. inadequate capital resource). This sounds very much
like what happens already but I am sure that it will be ramped up a bit more. There will also be cross-sector reviews carried out from time to
time where firms will be ‘invited’ to participate (e.g. a cross-firm review of
capital and liquidity.)
Conduct Classification
The Conduct
classification sets out how the FCA is going to transact with you under their
role as your supervisor. It is based on information that the FSA already has
about your firms conduct & performance in contacts, visits, thematics ,
surveys and workshops to date together with RMAR and any other intelligence
acquired and the number of retail customers that your firm has . (How do they
know that? The lender provides data on brokers and customers on a case by case
, customer by customer, basis of course.)
C1 and C2 firms
will have a dedicated supervisor – an
individual at the FCA with a team (this level of supervision is referred to as
a Fixed portfolio) and will be subject to review that cycles over 1 (C1) or 2 (C2) years, respectively.
I would not expect any of you to be in this category but if for any reason you
have been placed in these, please let me know as a matter of urgency.
C3 firms, which
should be the majority of small firms, will be subject to a 4 year cycle and will
have no dedicated supervisor (this is referred to as a Flexible portfolio). The
FSA have stated that they will be looking at the firm’s business model ( how it
operates) and will be looking more at
firms that stand out from the crowd (‘are outliers compared to their peers’) ,
presumably in how they operate or in the type of markets they serve or products
and provide. An obvious example under the new regime would be firms with a
higher than normal level of Execution Only cases. The cycle of review will be on a 4-year basis but interim reviews will
occur if the firm pops up on the radar, as it were.
C4 firms, and this should be the majority of you reading this document,
will also be based on a 4-year cycle. There
will be no dedicated supervisor and supervision will be carried out by a team of sector specialists .
Contact will be based on a ‘touch point’ at some time in the 4-year cycle. This
may be by any of the means available to them including workshops/ roadshows,
telephone interview, questionnaires & online interaction or a combination
of both. Your first experience of this is the MMR Engagement programmes. If you
didn’t go to the workshop / roadshow for example... Visits are not mentioned
but you should not rule these out. It
will be a lighter form of assessment
than for C3 but make no mistake, there is nothing ‘light’ about your
communication and interaction with your regulator. The FCA will be looking to
see how firms deal with and mitigate the risks posed to their business. Firm’s
that raise issues ( demonstrate sufficient risk to the FCA’s objectives) will
be subject to further intervention and
of course , ultimately, enforcement let’s not forget!
Next steps
Firms are going to
be moved onto the new framework on a phased basis from May to December 2013.
The FCA are unclear about C4 firms but this certainly applies to C1-C3. I would
imagine that although C4 is by default all the rest , and would assume that you could move across from
day 1, it is more likely that you will also have a phased move across to
coincide with the scheduling of the FCA
review cycles. We will have to wait on this but I suggest that from 1st
April, as far as the FCA is concerned, you are what you have been allocated and
you should act and plan accordingly.
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