In the report, the Commission raised concerns that the split between the FCA and the PRA could increase the risk that each regulator would focus on its own individual objectives and, as a result, fail to spot or tackle systemic weaknesses of leadership or risk management and control, which underpin problems in firms.

The Commission concluded that the FCA and the PRA should have available to them a special measures tool to identify and tackle serious failings in standards, governance and culture within the firms that they supervise, including failures at the most senior levels of a bank. The Commission stated that this special measures tool may be used as a precursor to formal enforcement action being taken by the FCA or the PRA, and Andrew Tyrie, chairman of the Commission, described the special measures tool as constituting a step between enforcement at one end of the spectrum and day-to-day supervision at the other.

In response to the Commission’s recommendation, the FCA, the PRA and the Treasury concluded that the regulators were able to address adequately serious failings in standards and culture by applying their existing supervisory and enforcement powers.

In the documents, the FCA and the PRA both stated that they intend to apply their existing supervisory powers to tackle serious failings in standards, governance and culture within firms that they supervise, including, for example, the use of skilled person reports. In addition, however, the FCA set out its new approach to supervising firms called enhanced supervision, which will apply to firms in which serious failings relating to standards, governance and culture are identified.

Where the FCA believes that a firm presents serious risks to its objectives due to serious failings relating to culture, governance or standards, and the FCA does not think that its usual supervisory approach will be sufficient to tackle those issues in a timely manner, the firm in question will be subject to enhanced supervision.

The FCA and the PRA set out examples of what they may consider to be indicators of serious failings relating to standards, governance and culture within firms. These include:

The FCA stated that it intends to take a judgment-based approach to determining whether firms should be placed under enhanced supervision and what action should be taken, as opposed to following a formal decision-making process.

If a firm is subject to enhanced supervision, the FCA has stated that:

These measures are similar to those imposed on firms placed on the FCA’s watch list. However, the FCA’s publication did not provide any insight into how enhanced supervision will fit in with the FCA’s watch list scheme.

Firms that are put under enhanced supervision are likely to experience a more intense relationship with their supervision teams and, as a result, can expect their activities to be subject to additional scrutiny. The FCA has also made it clear that, in some cases, enhanced supervision may be a precursor to a firm being formally referred to FCA enforcement.

The FCA explained that a firm that is subject to enhanced supervision will also typically be required to take the following steps:

These measures reflect the FCA’s clear and continuing focus on holding senior management accountable for their businesses, including in relation to implementing remediation measures.

They may also provide the FCA with a further, and more formal, way in which it may hold senior managers accountable for failings in the businesses for which they are responsible, including failings relating to the implementation of remediation measures. This will be further enhanced by the proposed new senior managers and certified persons regime, on which the FCA and the PRA are due to consult during summer 2014.

In its publication, the PRA stated that if serious failings relating to culture, governance or standards are identified, it is likely to also subject firms to its own form of enhanced supervision. The PRA described its version of enhanced supervision as a more intense style of supervision than its standard level of supervision and also said that additional resources would be devoted to supervising firms that are subject to enhanced supervision.