FCA Watchlist, strengths & weaknesses (22/98)

This is the latest in the series of daily blogs on financial regulation that I began posting on my first day of Covid wfh, 16 March 2020. I hope you enjoy and find useful...

News that the FT has seen an FCA letter informing a firm it had been put on the regulator's Watchlist reminds me of some of the value the Watchlist adds but also of the burdens and vagaries come with it.

Its birth dates back to the failure of Independent Insurance in 2001. One of the FSA's responses was to develop a better watchlist system that would quickly escalate firms with major regulatory issues to the top of the organisation. Importantly, it came with subsidiary department and divisional watchlists, so inevitably a cottage industry quickly developed. I'm sure this still exists, creating pluses and minuses for the regulator and for the supervisors involved.

The obvious advantage of the Watchlist system, a big one, is the level of scrutiny it creates around firms posing significant risks. This reduces the danger of supervisors underestimating problems and/or having too much confidence in the measures they have put in place to fix them.

The Watchlist also provide an important means of comparing, and potentially prioritising, different types of problems, different sized firms from different sectors. Inevitably, some of the scrutiny is subjective but, at its best, the range of experience and expertise in the room produces high quality discussions that provide a vital addition to how the regulator deals with its highest risk firms.

But the watchlist mechanism also creates some risks of its own that need to be guarded against. To take one example, the initial decision to put a firm on the department watchlist typically sits with the Supervision Manager or Head of Dept, and if they get that judgement wrong the firm in question will get less scrutiny that it would in a non-watchlist world. Northern Rock is an instance of this.

Another potential weakness is the resources required to report to the various scrutiny panels and committees. This can be a considerable burden and, for other than the biggest firms, Supervision teams will be stretched thinly. And, especially for cases with a public profile, this can become worse through an excess of enthusiasm from senior managers asking for additional information.

A core element of Supervision, the Watchlist has always been a challenge to operate successfully. Getting it right will be critical in helping regulators perform effectively through the current cost-of-living crisis.

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