I’ve written recently about the likely impact of Brexit on the behaviour and prioritization of regulators, and the FCA’s transition arrangements for SM&CR may be one of the first major examples of this playing out.

Although probably only implicit, it’s hard not to imagine that Brexit creates the wider context for the decision to convert all firms in the Core and Limited regimes (c.99% of the c.50,000 total) into the new regime automatically. As a result, only the c.350-400 firms in the Enhanced regime will have to submit a notification form.

Of course, given the concentrated nature of the industry, these large firms probably command easily the majority of the relevant markets, but the disparity in numbers is still striking. This is risk-based regulation in practice and, while it’s quite an extreme example, regulators are making similar calls fairly frequently. 

Rarely are they so visible, however, and so it’s worth thinking about what sort of considerations lie behind them and the implications for the firms involved as well as the regulator. Here are 4 as a starter:

1. Resources are essentially a zero sum game: If you expend more of them on one project, you have less to use on another. In this light, the FCA will have decided (a) how much Authorisation resource to attach to SM&CR; and then (b) how best to allocate it. Brexit may well have been a factor in the first decision, but the second will have had other drivers.

2. In the end, all decisions are risk-based: So a decision to spend equal time on large and small firms alike says as much about your attitude to risk as does the FCA’s decision to focus on the largest 1% of firms.

3. Thresholds matter as much as principle: It’s arguably quite an easy decision to decide to focus on the largest firms; what can be much harder is deciding where to draw the line. As one example, medium sized firms can still be quite large and complex, and may well have fewer resources to devote to compliance. Getting this wrong has been at the root of much regulatory angst.

4. Prioritisation only works if it’s effective: A statement of the obvious but, put bluntly, focusing on the 0.1% will only be justified if it succeeds in helping these firms resolve their main issues with implementing SM&CR.

There are no easy answers to this, and if major problems emerge later among the remaining 99% of firms, it will be harder for them (and for Supervision) to fix them. 

But at a minimum the FCA needs to get its conversion process right for the Enhanced firms. Meanwhile, those firms in the Limited and, particularly the Core regime, especially if they are at the more complex end, need to find ways to replace the level of assurance that going through a more formal conversion process would provide.