How Regulation Works

If you or your company have never been regulated before then you may wish to understand how FSA regulation works. Below is a very high level (and slightly simplistic guide) to get you started.

Firstly all companies involved in the ‘mediation’ of CTI contracts must be ‘authorised’ or ‘exempt’. Authorisation takes a number of different formats, but the most common are Directly Authorised or as an Appointed Representative (AR) of another company, the ‘Principal’. The former involves a direct application to the FSA and regulation by them. ARs are not directly regulated but must conform to the same standards as their Principal who is Directly Authorised and thus responsible for the actions of their ARs. The Principal therefore takes responsibility for monitoring AR’s regulatory compliance (which confers a significant responsibility on them.)

Whichever method of authorisation is selected companies once authorised are then legally obliged to achieve and maintain compliance with the regulations and the FSA will monitor and review this, taking ‘enforcement action’ where necessary if this does not happen.

The primary thing to remember is that Senior Management has responsibility for regulatory compliance. This responsibility cannot be dodged or delegated in anyway. Senior Management are responsible for introducing and maintaining systems and controls which ensure business operations are compliant with FSA regulations.

These systems and controls typically will affect:

Sales and claims processes
Customer relationships (prepare to get used to the phrase ‘Treating Customers Fairly’!)
Prudential controls and capital adequacy
Handling client money
Complaints handling
Staff Recruitment, Supervision, Training and Competence
Corporate Governance
Risk Management
Advertising and Promotion

In general affected business procedures and corporate governance will become more clearly defined, and record keeping will be more rigorous. Staff management and development will be more structured. Additionally, it may be that company culture must be changed to reflect unavoidable FSA principles such as ‘Treating Customers Fairly’. The overall business impact can be very significant for some firms. Those that refuse to comply face significant enforcement action – such as fines and public censure, and being prevented from continuing to trade in regulated markets.

The FSA assigns a risk category (high, medium or low) to each firm based on the risk each firm poses to its statutory objectives. Most small firms are categorised as ‘low’ because individually they do not pose a significant risk. Despite this the FSA has announced that it will visit 3,000 small firms in 2008 and 4,000 in each of 2009 and 2010 respectively.

The FSA website provides large amounts of information about regulation, including the register (listing all authorised firms) and the handbook (the detailed rules by which authorised firms are expected to abide.)

The physical activity of managing compliance may either be done by internal compliance officers or external consultants (who may perform regular auditing and assist in setting up compliant operations), or a combination of both. They report to the board which is ultimately responsible for ensuring that compliance is maintained.

To find out what they FSA says about how they supervise firms click here: