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Compliance

Welcome to our Regulatory News Alert!

Posted on 2 Mar 2012

FSA increases supervision and number of supervisory visits

In the past many FSA regulated firms may have avoided visits and probes from what used to be seen as a reactive, light-touch regulator. This is about to change drastically as the FSA is moving towards a more pro-active stance towards supervision of regulated firms. This is expected to lead to an increase of FSA visits and probes, with a wider scope of firms being targeted.

In a series of speeches given in early February, Hector Sants, CEO of the FSA, outlined the changes to be brought forward by the FSA’s “twin peaks” supervisory model that will become effective on 2 April 2012. The twin peaks model is part of a bigger reform process that will ultimately see the FSA splitting into the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

Whereas large financial institutions are going to be dual regulated by both the PRA and the FCA, smaller institutions – such as hedge fund managers – are likely to face scrutiny from the FCA. The FSA will prepare for the upcoming division of its responsibilities by splitting its existing supervision function into two different groups with distinct missions. Essentially this means that ARROW assessments are going to be replaced by two separate risk mitigation programs: Prudential and Conduct groups. According to Sants, these new supervisory groups will mainly consist of new hires (78%), highlighting the widespread organisational change taking place at the FSA.

The fact that the new firm-specific risk assessments and visits are going to have a narrower scope thus requiring fewer resources from the FSA should allow the FSA and its successor FCA to conduct more assessments and visits each year. This change will be most noticeable to the regulated firms that have so far remained under the FSA’s radar and may not have been subject to a supervisory review.

In the last six months we have also seen the FSA stepping up its enforcement efforts. By fining and banning hedge fund compliance officers Sandradee Joseph (Dynamic Decisions Capital Management Limited) and Alexander Ten-Holter (Greenlight Capital UK), the FSA gave a clear signal that persons responsible for compliance have to understand the real risks behind the business operations of the firm.