FCA reveals internal audit failures

Sarah Davidson

October 27, 2015

The report reveals six major failures by the regulator to manage risks across software asset management, its authorisation process of dual-regulated firms and its customer contact centre.

There were also 12 moderate failures identified in these areas and in additional areas including external IS security threats, supervision of C4 firms and the regulator’s approach to the supervision of firms’ trading activities and regulated covered bonds.

The audit said: “In respect of the design and implementation of the Pillar 1 supervision approach for C4 retail intermediaries, we raised a moderate finding regarding the absence of a method for measuring the effectiveness of Pillar 1 C4 firm supervision.

“We also found that the management of the supervision division had not calculated the number of full time equivalent staff required to deliver Pillar 1 C4 retail intermediary supervision.

“Management information was also not adequate to monitor the level of actual or forecast resource used on an ongoing basis for Pillar 1 C4 firm supervision across all the sectors.

“It was therefore not clear whether more resource was needed to deliver on the FCA’s supervision model.”

Andrew Tyrie, chairman of the Treasury Committee, said: “Eighteen months ago, the Committee sought reassurance that the FCA’s internal audit work is of a reasonable standard. Those for the period between January 2014 and September 2014 have been obtained. They are now being published.

“They contain a number of redactions, which have been examined on behalf of the Committee prior to publication. The undertaking of this work reflects the determination of the Committee, on behalf of Parliament, to engage in more rigorous scrutiny of the regulators, than had been the case prior to the financial crisis.

“These documents provide some useful evidence that the internal audit system appears to be working. The Committee will continue to examine the FCA’s governance as part of it regular scrutiny of the FCA.”

Robert Sinclair, chief executive of the Association of Mortgage Intermediaries, said: “The FCA has at last published documents requested by the Treasury Select Committee which shows them again in a less than flattering light.

“At the last TSC meeting the FCA defended its recent hike in fees because of its expanded responsibilities in consumer credit and payments.

“Intermediaries are at a loss to understand why they should pay 8% more to regulate these other sectors.

“The confirmed change in the way the FCA supervises firms by giving up the category one to four model before it has a chance to embed continues to confuse firms as they lose contact with supervisors.”

In March the regulator finally gave in to calls from the Treasury Select Committee to publish the audit reports. At the time FCA chairman John Griffith-Jones wrote to the committee expressing “real” concern about publishing the reports because of “anxiety” that they would compromise the annual review of the FCA’s processes.

It followed the publication of a damning report by the TSC into how the regulator handled last year’s pension closed book review which sent markets reeling and wiped millions off insurers’ share prices.

The committee’s report, which followed a review into the fiasco by Clifford Chance lawyer Simon Davis, said there was a need for scrutiny of the regulator.

Sign up to our daily email