Last week the FCA held its first ever Prudential Supervision Forum.  Now whilst it might be surprising to some that the FCA supervises firms on a prudential basis, as they have not been making loud noises about it, other firms are certainly aware of this fact.  As the Head of Specialist Supervision pointed out the FCA prudentially supervises approximately 24,000 firms making their views on issues such as CRD IV key for asset managers, broker dealers and AIFM firms alike.

The forum covered a range of key areas such as CRD IV, operational risk, liquidity, the Recovery and Resolution Directive and crisis management (otherwise known as wind-down). There were a number of key messages which came out of this such as:

  • Investment Firm Review – the Prudential Policy experts at the FCA noted that the EBA accepted that investment firms are different to banks and the review mentioned in the CRR is currently underway. This has several key questions to answer including a review of the application of liquidity and capital requirements to investment firms.  The FCA made it clear that the outcome of this review will be key to both CRD III and CRD IV investment firms with the expectation of a Commission report in the second half of this year.
  • EBA Supervisory Review and Evaluation Process (SREP) guidance – this was the favourite phrase of the forum repeated multiple times by a number of different people.  The main steer being this is the guidance that the FCA will be using when they assess firms so firms should use it to identify what needs to be covered in their ICAAP.  At over 200 pages this is not a short read however you can have a look at our previous blog on this subject, A drive to harmonise | EBA consults on SREP Guidelines, which gives a high level overview of what is covered. This guidance also states in which circumstances the FCA can accept diversification benefit under Pillar 2 though the theme from the forum was that 'good' evidence would be required to justify this.
  • Liquidity – one of the FCA's technical specialists provided a clear explanation of the key terms in the liquidity adequacy rule in their handbook suggesting that the regulator believes that firms may be non-compliant.  They specifically highlighted firms who use a central cash management process and the potential waiver available to rectify this.  They also clarified that the new liquidity rules in the CRR will not be applicable to investment firms until the end of this year following the EBA's delegated act on liquidity issued towards the end of 2014.
  • Recovery and Resolution and Wind-down – it was clear that the regulator believes that these two requirements are mutually exclusive. They gave a range of advice to firms that might have to complete a recovery plan and provide information to the Bank of England via the FCA for a resolution plan to be built.  However they also made clear that they expect wind-down documents to start with a plan as to how a firm would wind-down and take into consideration a range of factors such as operational issues, communication plans, recognition of the starting point and actions based on this, identification of all additional costs and dependencies (for example where you might need a regulatory decision).

Whilst these were some of the key messages the regulator provided a range of others points throughout the day so if you were unable to attend or are interested in knowing more please get in touch.

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