Prudential Regulation Authority Rulebook

Our approach to regulation is described in A New Regulator for the New Millennium published by us in January 2000 and in subsequent progress reports. We use an assessment of the risks to our statutory objectives to prioritise our efforts and focus on the most significant risks.

Our operating framework translates these overarching objectives into a risk-based approach used across the FSA. The approach includes an assessment of risks at the firm level and at the consumer, product, market and industry levels. At the firm level, we use the framework to assess the risks that individual firms pose to our objectives and to decide our regulatory response to those risks. The level of supervisory intensity depends on our assessment of impact (the effect on the statutory regulatory objectives if a risk occurs) and probability (the likelihood of a risk occurring).

A small firm with a simple business model, a local retail client base and no recent history of regulatory problems is likely to be low impact and its regulatory relationship with the FSA will reflect this. These firms will not have a dedicated FSA relationship manager but will have a contact point in the supervisory division. In the case of small IFA firms, it is the Investment Firms Division (IFD) Contact Centre.

An important part of the monitoring of low impact firms is the receipt and monitoring of returns and notifications (see Chapter 12 of this Overview for more information). Firms send us Returns required under the Handbook (e.g. audited accounts, financial returns and complaints returns) that we monitor to identify potential breaches of regulatory requirements. We will not carry out routine visits to small firms and there will normally be little contact with the firm on an individual basis. However, we may make visits in response to risks identified from returns and other sources of information. In addition, the firm or its business will be covered from time to time by our sector-wide projects (themes) to monitor compliance standards in a class of firm or firms as a whole.

The Investment Firms Division (IFD) has developed a supervision strategy for small firms, which includes the above elements. Its primary focus is on mitigating the risk of failure of a substantial number of low impact firms within a sector. Although individually firms are low impact, collectively the impact of these firms may be much greater.

The overall strategy includes:

Where a firm is non-compliant, we will only take enforcement action where we consider that is appropriate. Where firms show a lack of awareness of regulations or are reluctant to change, we will try to help these firms to help themselves, for example, by explaining how their record keeping can be improved. Improved record keeping benefits both clients and the firm itself through improved management information. We will also encourage these firms to increase their level of training and to make use of contacts with the FSA, trade associations, product providers, auditors and consultants.

Where a firm is compliant, we will try to help it maintain high standards. Such a firm provides a benchmark of best practice that can be spread more widely within the total population of firms. Our overall supervision strategy is to educate all firms about our rules.