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FCA Supervision and Prudential Categories

The FCA objectives

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The FCA has an overarching strategic objective to ensure that the relevant markets function well. This is embodied in our three operational objectives:

  • to secure an appropriate degree of protection for consumers
  • to protect and enhance the integrity of the UK financial system
  • to promote effective competition in the interests of consumers

These objectives are the foundation of their approach to supervision. Get our Free 20 Page PDF at http://eepurl.com/caflen
In their relationship with you they want to ensure that fair treatment of consumers is at the heart of your business, and that you do not adversely affect market integrity and competition

Prudential classification and what this means for how a firm will be supervised

For those firms where the FCA is their prudential regulator, prudential analysis and monitoring are part of the overall supervision approach, and inform targeted supervisory work where financial and prudential risks could make firms vulnerable to behaviour that harms consumers, damages market integrity or otherwise poses risks to the FCA’s statutory objectives. Financial and prudential analysis also takes into consideration potential contagion effects – from a legal entity to other members of a group, or from a firm to the remainder of its sector.
The prudential classification is based on an analysis of data provided by firms in their regulatory returns. Additional information and data is reviewed where regulatory returns do not provide a complete picture of a firm’s complexity or potential market impact.
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P1 Firms

Firms will be categorised as P1 if they are prudentially critical and their disorderly failure would have a significant impact on the market in which they operate (for example, because a particular market is highly concentrated, so that a disorderly failure of one player could not easily be assimilated by the others and/or where there are significant client asset and money holdings).

P2 Firms

Firms will be categorised as P2 if they are prudentially significant firms and their disorderly failure would have a significant impact on the functioning of the market in which they operate, but there is a smaller client asset and money base or an orderly wind-down can be achieved.
Broadly, groups classed as P1 or P2 can expect a periodic assessment of their capital (and, if applicable, liquidity) requirements and how well they meet our broader prudential expectations, some of which may be encapsulated in Risk Mitigation Programme. This may entail prudential focused firm visits.

P3 Firms

Firms will be categorised as P3 if they are prudentially non-significant and their failure, even if disorderly, is unlikely to have significant impact. We will be relying more on firms’ own assessment of their financial resource requirements and focus on monitoring alerts that arise from inconsistencies and/or prudential failings. P3 firms may also be subject from time to time to a prudential assessment by the FCA as part of a peer group exercise, i.e. a cross-firm review of capital and liquidity standards.

P4 firms

These are firms which due to their specific nature or circumstances require a differentiated approach to prudential supervision. This can include firms in administration / insolvency or entities with special supervisory regimes.
The conduct and prudential classifications are developed to reflect the way different aspects of a firm’s operations can potentially impact the FCA’s objectives, and therefore it is possible for a firm to be significant from a conduct perspective but less so prudentially, and viceversa.
Applicability to groups
The FCA prudentially classifies any group with FCA solo regulated entities. This includes a group with only FCA solo regulated entities or one that also contains PRA dual regulated entities. The FCA does not, however, prudentially classify a group with only PRA dual regulated entities.
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