Among the many regulatory powers available to the Financial Conduct Authority (FCA) is the ability for it to supervise a financial services firm.

In a strategy document covering the five years 2025 – 2030, the FCA indicated that it intends to take a more flexible approach to supervision by allowing firms to make positive changes with less intensive regulatory action.

But what does this mean for firms facing the prospect of supervision? In the below FAQ-style blog, Nisha Patel, an associate solicitor in Hickman & Rose’s business crime team, looks at how FCA supervisions work in practice, and sets out the basics of challenging an FCA intervention.

What triggers an FCA supervisory intervention?

The FCA’s powers are governed by the Financial Services and Markets Act 2000 (‘FSMA 2000’). Section 55J of this Act states the FCA can vary or cancel a firm’s permission to carry out regulated activities if it considers the firm to be failing to satisfy (or likely to fail to satisfy) a so-called “threshold condition”.

Threshold conditions are the foundational ethical and practical standards that are considered fundamental to maintaining a robust and trustworthy financial system. Threshold conditions include:

Appropriate office location. If a firm is incorporated in the UK, its head office and registered office must be in the UK.

Effective Supervision. The firm must be capable of being effectively supervised by the FCA.

Appropriate resources. The firm must have appropriate financial and non-financial resources in relation to the regulated activities it carries out.

Fit and proper. Those who manage a firm’s affairs must have adequate skills and experience.

Suitable business model for the approved regulated activities.

Any actual (or suspected) breach of any one of the above can lead to supervisory action.

The FCA also has the power to use its supervisory powers if a firm has not carried out any regulated activity for a period of at least 12 months.

What are FCA Voluntary Requirements (VREQs)?

One important element of FCA supervision is agreeing voluntary requirements with a firm.

VREQs, as they are commonly known, usually arise after a supervisory meeting with the regulator. If a firm refuses to agree to the suggested requirement, then the FCA will likely impose a non-voluntary “Own Initiative Requirement”( explained further below).

While a firm may feel under pressure from the FCA to sign a VREQ, the decision to do so should not be taken lightly.

VREQs can be onerous. They can affect a firm’s long-term strategy, goals and objectives. They can include restrictions on a firm to not take on any new business, or not to dispose of any of the firm’s assets – both of which may prove fatal to the ability of a business to continue to function.  

If a firm signs a VREQ, the requirement will be published under the firm’s name on the publicly accessible FCA register.

How can a firm challenge an FCA Voluntary Requirement (VREQ)?

It is possible to challenge a VREQ, and there are various options a firm might take to do so.

A firm may make representations to the FCA that a VREQ is not necessary. It may instead offer internal changes; or propose a different course of action.

The FCA’s 2025 – 2030 strategy document, mentioned above, states the regulator encourages positive engagement. It can prove effective if handled appropriately.

Alternatively, directors can offer undertakings to the FCA that address the specific aspect of the firm’s non-compliance with the threshold conditions. Legal advice can be of assistance when considering these options.

What are FCA Own-Initiative Requirements (OIREQs)?

An Own-Initiative Requirement (OIREQ) is a supervisory power used by the FCA to impose a requirement on a firm. Unlike VREQs, OIREQs are compulsory.

OIREQs are generally used when the regulator has serious concerns about a firm or the way it is conducting business which needs to be addressed immediately.

Situations giving rise to these circumstances may include where there is a risk of adverse effects to consumer; where a firm has submitted inaccurate or misleading information to the FCA; or where the firm’s conduct indicates it may be involved in criminal behaviour.  

The FCA issues an OIREQ by serving firms with a First Supervisory Notice (FSN). An FSN takes effect immediately and can be made without any notice or warning to the firm beforehand.

Having been issued with an FSN, the firm can then make written representations to the FCA to vary or remove the OIREQ. The FCA will normally engage with these representations. However, if the FCA still feels that the firm’s behaviour requires redress, it will issue a Second Supervisory Notice (SSN) which reaffirms or adjusts the OIREQ made under the FSN.

The practical impact of an OIREQ on a supervised firm depends on the nature of the requirement imposed. An OIREQ can an extremely damaging impact on the operation of the firm.

In cases where the FCA has very serious concerns about how a firm is carrying out its business, it may impose an ‘all permissions’ OIREQ. This cancels the firm’s permissions to conduct regulated activity.

Although OIREQs are sometimes understood to be more ‘serious’ than VREQs, in practice, the latter can lead to the former: non-engagement by a firm can mean that a voluntary requirement quickly becomes an imposed requirement, which is why continued, productive dialogue with the regulator is highly recommended.

How can a firm challenge an FCA Own-Initiative Requirement (OIREQ)?

A supervised firm can challenge the FCA’s decision to impose an OIREQ by taking the decision to the Upper Tribunal. This right to challenge becomes available as soon as the FCA issues an FSN.

The Upper Tribunal will consider whether the decision made by the FCA was ‘reasonable’. In practice, the decision of the FCA will almost certainly pass this threshold. There has yet to be a Tribunal decision overturning an FCA OIREQ.

The lack of successful challenges at Tribunal demonstrates the importance of firms seeking legal advice so that effective representations can be made to the FCA as soon as possible. The consequence of not doing so is that a firm must live with an OIREQ, which could potentially devastate its business and cause it to wind down.

What happens if a supervised firm breaches an FCA requirement?

The FCA has shown that it is willing to impose substantial fines on those firms who are subject to a VREQ and breach the agreed conditions.

In October 2024, the FCA fined Starling Bank approximately £29,000 after the Bank failed to comply with a requirement restricting it from opening new accounts for high-risk customers. In July 2024, CB Payments Ltd was fined by the FCA for breaching a similar VREQ.  

Where a firm does not comply with an OIREQ, the FCA is likely to seek a court injunction. This is because the FCA have already used their mandatory powers in the form of an OIREQ. Breaching any requirement imposed by a court can be treated as contempt of court.

Any FCA-regulated firm which is – or suspects it may be – subjected to supervisory action is advised to seek specialist legal advice as soon as possible.