The Parliamentary Commission on Banking Standards ("PCBS") has previously raised concerns that certain weaknesses identified within the banking sector during the financial crisis could be attributed to a "failure of standards at the most senior levels" within banks and financial services firms. The proposed response by the PCBS to address these failings was the deployment of a new regulatory "special measures" regime where the Financial Conduct Authority ("FCA") or Prudential Regulation Authority ("PRA") identifies serious failings in standards, governance and/or culture of a firm. Under the PCBS's proposals, this special measures regime would form a step between day to day supervision and the use of formal enforcement powers. Where the regulator identifies serious failings at a firm, it may commission an independent report identifying any concerns, and the firm would formally commit to address any issues in order to raise standards in the relevant business area.
FCA policy statement
In June 2014, the FCA released a policy statement responding to the PCBS's proposals, setting out how the special measures regime will be put into place. The statement introduces a new "Enhanced Supervision" tool to strengthen the FCA's supervisory powers and further scrutinise firms where governance issues are identified.
A number of examples of the types of serious governance failings which would lead to the use of Enhanced Supervision are set out in the policy statement. These include:
- numerous, repeated or especially significant conduct failings;
- observing conduct failings across different business areas, which could indicate a wider cultural issue;
- signs that the Board is functioning poorly, including a lack of executive challenge, not pro-actively leading on conduct or cultural change;
- poor management of governance-related areas including Risk, Compliance and Internal Audit, including lack of opportunity to be heard at Board level;
- weak risk management (including any prudential risk failings found by the PRA); and
- evidence of other weaknesses in the way senior management influence key cultural factors in the institution.
The regulator will notify firms that they have been placed under Enhanced Supervision following the identification of the governance and conduct failings. Senior management of firms under Enhanced Supervision will be expected to provide a formal commitment to bring governance standards back up to the level required by the FCA. The regulator will reinforce this by creating a supervisory strategy and considering which tools or powers it can best use to mitigate the weaknesses identified. These powers are outlined in Annex 1 to the Policy Statement and include independent Skilled Person reviews under Section 166 of the Financial Services and Markets Act 2000 (FSMA), imposing Own Initiative Requirements to force a firm to undertake or cease a particular action (Section 55L of FSMA), removing a firm's permissions using an Own Initiative Variation of Permission (Section 55J of FSMA), and prohibiting dealing in the firm's assets (Section 55P of FSMA).
It is important to note that the approach taken by the FCA in each instance will differ, depending on what governance issues cause them the most concern. However, consistency will be achieved via a monthly report on the firm sent to the FCA Board and Executive Committee, which will contain status updates on the governance issues which have led to the Enhanced Supervision. A decision will then be made as to when the Enhanced Supervision can be lifted and the FCA is able to return the firm to its normal day-to-day supervisory regime.
This more intensive supervision regime will allow the FCA to tackle perceived failings in standards, governance and culture at firms more quickly. The Enhanced Supervision regime forms part of the FCA's wider strategy of early intervention and seeks to address concerns about senior management accountability and governance standards within firms more generally.