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Be prepared, not afraid
Many of you will remember when FSA chief executive Hector Sants was widely quoted last March as warning “be afraid, be very afraid”, pertaining to a view that the regulator needed to increase its activity on supervision and enforcement.
It appears that he was as good as his word and, currently, not a month goes by without numerous reports of FSA enforcement action against IFA firms.
This is underpinned by an evolving approach to regulation and supervision at Canary Wharf, with a remit to pursue market abuse and inadequate management far more aggressively.
A new army has been recruited, supported by a substantial increase in staffing and training - 537 new regulators have been added to the FSA team in the past year.
Advisers actively engaging in fraudulent activities have always been in the headlines but there are increasing reports of individual directors of small firms and sole traders being fined for failing to have appropriate systems and controls.
In the past, the general belief was that small firms fell below the radar for FSA reviews and would only be visited reactively if they were referred to the regulator regarding an issue.
However, this position has very much changed and the FSA now has the resources to be proactive, with every firm targeted to receive a visit at least once within a three-year period on treating customers fairly.
There is a danger that advisers with a spotless record, who have perhaps never even experienced a complaint against them, could be lulled into a false sense of security by believing this means they are doing all the right things. However, such firms can risk being caught out if they are not able to adequately demonstrate they are fulfilling their regulatory responsibilities.
Contrary to Mr Sants’ declaration, there is no need for IFAs to be afraid as long as they are well prepared and fully understand their regulatory responsibilities.
There is, of course, an abundance of professional support available to help ensure firms meet all of the requirements, which, in turn, should provide not only a more secure regulatory platform to operate from but can also often lead to increased business opportunities and efficiencies.
In considering their position, principals first need to be brutally honest about their firm’s capabilities, experience and strengths.
Three key areas where directly authorised firms commonly may not have the required structure are training and competence supervision, file checking and management information.
Companies should ensure there is a procedure in place for the ongoing supervision of its advisers to monitor their competence.
Businesses require a file review procedure - a suitable percentage of advice needs to be checked and a sound audit trail needs to be documented.
Management Information is strongly linked to TCF and the quality of management information and how it links into procedures needs to be assessed.
“Be prepared, be very prepared” should be an obvious mantra for principals of small firms but sadly this is not always the case when the FSA come knocking.
It is wise to invest additional time in preparing your firm for a visit and even if one does not occur, you will still ultimately benefit from the activity. Now is the time to be prepared, not afraid.
Keith Richards is distribution and development director at Tenet Group
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Readers' comments (22)
Anonymous | 7 Sep 2010 4:25 pm
Hector Sants is no more than a playground bully, and with any luck he will receive his comeuppance like any bully does.
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Anonymous | 7 Sep 2010 4:34 pm
Re the last comment: Hector Sants appears to be doing very well for himself at the moment though...I would give him your dinner money if I were you.
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Robert Donaldson | 7 Sep 2010 4:48 pm
Sounds very much like a sales pitch for a network to me!
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Anonymous | 7 Sep 2010 4:52 pm
Anon 4.34pm. I never back down for bullies.
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Anonymous | 7 Sep 2010 5:14 pm
Anon 4:52 pm. You pay your fees, which pay his wages and your business activities fall under the FMSA - which he and his friends regulate.
No sign of a comeuppance yet having recently made friends in the Coalition - nor anytime soon. These people look after their own...
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Alasdair Sampson | 7 Sep 2010 5:17 pm
I agree with Keith Richards’ “be prepared, be very prepared” in relation to regulatory compliance.
It sounds good, at least in principle.
The theory is, however, very different for the small IFA firm – ask any of the firms subjected to the UCIS thematic review.
I act for 4 separate IFA firms who are currently in FSA Supervision and 2 firms who are currently in Enforcement over UCIS promotion.
The FSA’s recent UCIS thematic review disclosed that about 70% of the firms reviewed – a tiny sample of the whole – were in breach. I noticed one IFA, a client of mine, commenting on the MM blog that such a failure rate perhaps says more about the opaque complexity of the Rules rather than the inability of the IFAs reviewed to adhere to them. I have to agree.
It doesn’t matter how prepared an IFA may be, the FSA officer inspecting the files will find something wrong.
The COBS Rules, and others, are very long on telling an IFA what he requires to do and what duties he requires to discharge but are very short on even guiding, let alone prescribing, how the IFA should go about doing what he needs to do and, more importantly, how he records that to the FSA’s satisfaction.
And there is the rub – what is acceptable to one FSA officer may not be acceptable to another but so much depends on the personal preference and interpretation of the FSA officer.
In one of my cases, the FSA supervision team commented three times at the UCIS inspection that what my client was doing was “good practice” and at one point was “best practice”, but somehow when another officer issued the UCIS report these points then seemed to give cause for “serious concerns”. How does that work?
One IFA was informed by the Supervision team that the use of meeting minutes was “good practice” but the very same management tool was slated by the subsequent Enforcement officer who plainly didn’t like them because they could just have been made up. Some what overlooking the IFA’s procedure of issuing the minutes to the client by post for approval. So how come what’s acceptable and good practice to one FSA officer then suddenly becomes the opposite?
Whilst the FSA pursue the standard of perfection, the problem is that no professional adviser’s files can all be right all of the time. And I dare say that goes for the FSA too. No quarter is given.
In one case the FSA supervision failed to examine the IFA’s computer files which are frankly enormous. The supervision team leader later stated that she had never been offered the opportunity to inspect it. I challenged them to produce that evidence in a sworn affidavit. I made clear to a fresh Enforcement team that if FSA produced such an affidavit then I would bring in the police. That aspect of the investigation has since been dropped.
Even when the files are inspected one cannot be sure that the FSA officer will recognise what he/she is looking at. Further there is no guarantee that that what they do read will be properly represented when regurgitated in a report. I have one case where client file reviews contain material relating to investments which has nothing to do with those clients and which those clients don’t have.
So even if the files are perfect and everything is where it should be – assuming that the IFA can guess in advance how an inspecting officer likes things done – there is no guarantee they will read it or read it correctly.
Indeed there is professional advice available to the IFA. In two cases I am dealing with the IFA took advice from their compliance advisers on the their sale of UCIS only to discover very late in the day, and too late to do anything about it, that the advice was in one case fundamentally flawed and in the other mistaken as regards the nature of a HNW certificate that could be used.
And as every IFA should know, simply because you have taken and acted in good faith upon the advice of a professional compliance adviser does not alleviate the IFA of the responsibility for the ensuing breach of the rules.
So, frankly, Mr Richards until the excesses of the FSA investigations are curbed, and until the inspections are subject to appeal independently – and by that I mean the application of some proportionality and the oversight of an independent appellate body – then I fear that Mr Sants “be afraid, be very afraid” will prevail.
If any IFA needs advice contact me on Alasdair@sampson-law.com.
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Nick Bamford | 7 Sep 2010 5:27 pm
" A life lived in fear is half a life"
Keith is absolutely correct don't be afraid be prepared that makes much more sense
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Anonymous | 7 Sep 2010 7:43 pm
Anon 5.14pm. David & Goliath my friend.
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Anonymous | 7 Sep 2010 7:43 pm
and most of us, no matter how prepared we are, are living half a life.
Alasdair Sampson is right, Nick Bamfiord and Keith are living in cloud cuckoo land.
The fsa can do as they please.There is no rhyme nor reason to them.
We should all be VERY afraid of an organisation that has the power to act outside of the law.
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Man in Black | 7 Sep 2010 10:24 pm
I would like to commend Alasdair's comments - he is quite correct.
What the rules supposedly mean in practice is often a highly subjective exercise.
'Principles Based Regulation', TCF and 'Outcomes' based regulation are just code for the FSA wanting arbitrary power.
This means that you can pay away large amounts for 'compliance support' that in truth will simply be disregarded if you happen to be doing something FSA does not like.
When it comes to file-checking for example, an FSA mandated 'skilled person' can come up with very different results to the best Compliance Consultants out there.
If you are paying for 'compliance support', at least pay for somebody more likely to understand the technical and advice issues - not a box ticker. There is no point in you being forced to obtain a level 4 exam and then having your advice checked by somebody who is not a level or two higher themselves. A consultant with some 'credentials' can often be cited in defence - though as Alasdair says, they'll still try and ignore this if they really want to get you.
Likewise, make contact with the sorts of Regulatory Contacts who can help dig you out of a whole if things go wrong - people who have practical experience of how the FSA works, how to handle awkward FSA personnel, and when to dig in for a proper scrap.
Either way, this will certainly NEVER be one of the large Network/Service providers who just employ box-ticking types.
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