By Harry Barnes, Principal Compliance Consultant
Firms regulated by the UK’s Financial Conduct Authority (FCA) will be well used to completing regular FCA surveys. However, what firms may not realise is that these surveys are increasingly the starting point for FCA supervisory action.
The UK financial regulator is using its survey findings to determine which firms to investigate, rather than waiting for a specific issue to arise. And in cases where the FCA is finding issues during this supervisory action, they’re increasingly exercising their more intrusive VREQ/OIREQ powers.
In this article, we explain how FCA surveys can evolve into further supervisory investigation, the significance of VREQs and OIREQs, and why it’s critical to ensure that initial FCA survey responses are completed carefully.
FCA sectoral surveys are now a regular occurrence, but can be ‘one size fits all’
Over the last few years, the FCA has been implementing annual surveys for most categories of firm under its supervision – corporate finance firms, asset management and alternatives firms, wealth management and stockbroking firms. These surveys, which rely upon the FCA’s powers under S165 FSMA, are used to collect a wide range of information that isn’t otherwise gathered through regular FCA reporting. The annual surveys may also be supplemented by thematic reviews addressing certain issues, such as a recent review into private market valuation practices.
Given the broad nature of the FCA’s supervisory categories, surveys may not entirely align with how a recipient firm operates. Unless a firm believes it should be in a different supervisory bucket, the FCA will expect completion of the survey on a best-efforts basis – even if some of the questions are not relevant.
It is often these situations – where questions aren’t well aligned to a firm’s business model – that lead to a firm’s response raising concerns with the FCA.
FCA surveys are often now the trigger for supervisory action
It has become increasingly common for these surveys to raise red flags and trigger the FCA to take further supervisory action against a particular firm. Typically, this comes in the form of follow-up S165 requests for information and/or documentation.
From here, the FCA may progress to on-site visits and follow-up questions on the information/documentation received. There’s always a risk at this point that the scope of the FCA’s investigation is broadened and further topics become the subject of questioning.
What is a VREQ and what does it entail?
When the FCA has serious concerns about a firm, particularly when it comes to potential investor harm, financial promotions, client categorisation or anti-money laundering (AML), it’s increasingly seeking agreement from firms to impose a ‘Voluntary Requirement’, or VREQ.
A VREQ is, strictly speaking, a voluntary measure. However, the FCA will present the firm with the specific requirement it’s seeking to impose and a short deadline by which the firm must choose if it’ll comply. This requirement can vary, with potential restrictions including:
- Preventing the firm from taking on any new clients
- Preventing the firm from accepting investments (from new or existing investors) into some/all of the fund vehicles it manages
- Preventing the communication of financial promotions
- Preventing the disposal of assets
These sorts of restrictions can, naturally, have major operational and commercial impact, and will stay in place until the FCA is satisfied that the firm has sufficiently remediated the areas of concern.
A VREQ is also published to the firm’s entry on the FCA register.
What happens if a firm refuses to agree to a VREQ?
The FCA encourages positive engagement from firms, and those that work proactively with the regulator are more likely to make a successful case that a VREQ is not necessary. Often this is done by showing good faith engagement, recognition of the issues raised, and implementation of a remediation plan.
If a firm refuses a VREQ without such cooperation, the FCA might move towards its next supervisory tool: the OIREQ.
What are OIREQs?
The ‘Own-Initiative Requirement’ (OIREQ) is an elevated FCA power that does not require the firm’s agreement and can be imposed immediately by the FCA. If a firm has refused to agree to a VREQ, it’s likely that the FCA will instead impose an OIREQ of the same nature.
An OIREQ is imposed via a ‘First Supervisory Notice’ and, as per VREQs, will be published on the FCA register.
How to remove a VREQ/OIREQ? Effective remediation
Once a VREQ or OIREQ is in place, the FCA will want to see the firm remediate the issues raised. In some cases, this can be a quick process, but for other firms this process could run into multiple years.
The regulator will often want to see the firm engage with third-party experts as part of this remediation plan. The changes made must be demonstrable and focused specifically on the harms identified.
Whilst remediation is the path to seeing the VREQ or OIREQ removed, the failings that led to its imposition could still result in further supervisory action against the firm or individuals within it, such as the imposition of fines.
If your firm receives an FCA survey, here’s how we can help
If your firm receives a survey from the FCA, it’s highly advisable to consult an expert on your answers to avoid any mistakes that could lead to unnecessary further investigation.
At IQ-EQ, we have a sizeable and highly experienced team of UK compliance consultants who can advise on the completion of S165 requests for information and on how best to approach FCA survey questions that may not fit your business model.
We’re also on hand to help with how your firm should approach any further supervisory action, whether that’s a Q&A by email, on-site visits from the regulator, VREQ/OIREQ imposition or remediation plans.
