For any consumer credit business, receiving a supervision enquiry from the Financial Conduct Authority (FCA) can be a stressful and overwhelming experience.
Although these types of requests are a standard part of the regulatory oversight, how you respond to a request can determine whether the matter is closed immediately or escalated to a formal investigation. As the FCA has now adopted a data-led approach to the processes, to protect your authorisation, you will need to demonstrate that your business is compliant, transparent and focused on providing the best consumer outcomes.
Determining the legal basis of a request
Before you begin drafting a response, it is important that you identify the legal authority behind the enquiry, as you may inadvertently respond to the wrong request. The FCA typically uses three different levels of intervention, depending on what their specific concerns are or the scope of the thematic review they want to conduct.
Informal enquiries:
Informal enquiries frequently arrive via email from a supervisor or as part of a multi-business review. Although they might appear voluntary, if you offer a poor or dismissive response to the enquiry, it can lead to the FCA moving to more formal investigations.
Section 165 information requests:
Information requests are becoming more popular with the FCA and represent a formal statutory power under the Financial Services and Markets Act 2000. If your business has been presented with a Section 165, you are legally required to provide the information the FCA has requested, and failing to do so can be treated as a criminal offence that directly threatens your threshold conditions (authorisation).
Section 166 skilled person reports:
These are considered an advanced supervisory tool where the FCA appoints or approves an independent expert to investigate your firm at your expense. If the FCA has actioned a section 166, it generally means that the FCA has lost confidence in your internal reporting or your governance framework.
What the FCA examines during a supervisory review
The FCA has transitioned from the implementation phase of its new rules to the impact phase. This means they are now scrutinising the actual results of your business activities on your customers rather than simply reviewing your written policies.
- Evidence of outcomes: You must provide Management Information (MI) that proves your customers are achieving good results. Equally, you can no longer simply have a policy that explains what your business does for vulnerable customers: you need to be able to show the data on how many were identified and what support your business was able to deliver.
- Fair value assessments: The FCA has put a lot of weight on building customer trust, which means they will examine your pricing models to ensure that the cost of your credit products is proportionate to the benefits that are provided. What this means for your business is that they expect to see a fair value assessment for every product you offer.
- Governance and culture: Under the Senior Managers and Certification Regime (SM&CR), the FCA needs to see that your business’s senior leaders, directors, and managers are taking personal responsibility for the business’s compliance. They may, for example, request to see all the board minutes to verify that any regulatory risks are being discussed at the highest level.
- Operational resilience: The FCA will also test whether your business can continue to function during a major disruption, such as a cyber attack, like the one seen by Marks and Spencer, without causing considerable harm to your customers.
Understanding thematic reviews and sector priorities
The FCA will often conduct thematic reviews of particular sectors to ensure that customers are being treated fairly, and help the FCA to identify widespread risks so that they can set benchmarks for businesses to offer good practice to their customers. Below are some of the sectors that will often have a thematic review:
- Motor finance redress: These are often conducted to ensure that motor finance businesses have adequate financial resources for potential redress schemes and that any commission models are fully transparent.
- Buy now pay later (BNPL): As BNPL is now moving under regulatory oversight, the FCA is conducting creditworthiness assessments to ensure that customers are not taking on debt they can’t afford
The three core principles of communication
When responding to a supervisory enquiry and reducing any risk during communicating with the FCA, your business will need to ensure that you adhere to the core principles of communication. These include:
Absolute data consistency
As the FCA is focused on being a data-led regulator, they are now comparing the information you provide them in their enquiry to the information they previously had about your business. If they find any discrepancies between your internal management information and your RegData submissions, you must be able to explain the difference immediately, as any inconsistency may be interpreted as your business lacking control or an attempt to mislead them.
Evidence of outcomes
Under the Consumer Duty, your business needs to be able to prove that your policies lead to good outcomes for your customers. For example, instead of saying that you have an extensive vulnerability policy, you must be able to provide the data showing that you identified a specific number of vulnerable customers and offered them support.
Transparency and principle 11
Principle 11 in the FCA Handbook highlights that businesses need to work with the FCA in an open and cooperative way. What this means is that if you have discovered a mistake when preparing a response to a supervision enquiry, you need to tell them and must provide a remediation plan, rather than wait for the FCA to discover the issue themselves.
How ALPH Legal and Compliance supports you with FCA supervision enquiries
We understand that receiving a supervision request is stressful, time-consuming, and daunting to deal with, especially when the future of your licence is at risk. At ALPH Legal and Compliance, our team are experts in helping you draft a response and ensuring that all your data and policies the FCA requires are accurate and up-to-date, so that you can focus on running your business during an FCA supervisory review.
If you have received a supervisory enquiry, speak to our team today, who are more than happy to assist.