FCA deep dives - sink or swim?

Posted: 17th March 2014

In 2014 the Financial Conduct Authority (FCA) will spend its time and resources looking forward. In doing so, it will use business model and strategy analysis (BMSA) to inform the work it conducts in the context of the Firm Systematic Framework.

Given recent flooding, it seems appropriate that the FCA’s forward looking or proactive work will, amongst other things, take the form of a ‘deep dive’.

FCA’s deep dive tool

The FCA has, not without cause, decided to spruce up its language; a deep dive really is as it sounds. When the FCA deep dives into your business, it prepares, enters the waters at the top, dives all the way to the bottom and then comes right back up to the surface again.

In business terms, the FCA will start at the top by interviewing senior managers, understanding the culture and messages they are cascading. In short, ensuring that a firm’s behaviour, attitude and motivations are centred on good conduct, especially regarding the experiences and outcomes the firm offers its customers.

What sort of deep dive will my firm have?

Deep dives only apply to C1 and C2 firms in one or more of four areas:

1)    Governance

2)    Product design and pre-transaction

3)    Sales and transactions process

4)    Post-sales handling

There is a common process for each assessment: information gathering, desk based analysis, and a firm visit and communication with the firm. This process supports the FCA’s assessment of the extent to which a firm has fair customer outcomes and market integrity at the heart of its business.

Deep dive: product governance

If the FCA were interested in your firm’s product design and pre-transaction process, for example, supervisors would look at a new product right from design stage to delivery.  The dive would begin with questioning senior management about the strategy for the product and the senior management challenge around its inception. Supervisors may then check how those messages reach staff at every level in the organisation by interviewing staff throughout the firm from the top, level by level, right to the front line.

X marks the spot: root causes

The FCA will address the root cause of any deficiency it finds following the deep dives. The FCA will assess whether the cause is people or process based, or whether, in fact, these causes are only symptoms of deeper issues. Supervisors can ask: “Is this a symptom rooted in deeper systems and controls issues or is it down to senior management failings?” The FCA can even ask the question “is this failing rooted in an issue with the firm’s business model and / or strategy?”

How often are deep dives carried out?

A C1 firm will experience a minimum of two deep dives per year on a one year cycle (see next section). The FCA will undertake a minimum of one deep dive per year on C2 firms, on a two year cycle.

What output is there?

At the end of each cycle the firm receives a letter. This sets out the FCA’s view of the firm and the risks it poses to FCA objectives. The letter includes the supervision work programme for the next period as well as actions the FCA expects the firm to take to address root causes of problems and remedy particular deficiencies. This would take the form of a risk mitigation programme.

How can firms prepare?

Deep dives are forward looking, so firms will only have short notice of the subject matter. It will be difficult to predict which area FCA may focus on and the ripples it will cause.

What senior management can do is maintain a good understanding of the firm’s business model and strategy. Senior managers should also undertake a robust assessment of conduct risk within the firm, and document it, along with plans to mitigate it. That way, the focus of the FCA’s deep dive, and the issues it finds, may not be such a surprise after all.