FSA finds small firms lacking in financial crime controls
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Many small firms do not have adequate systems and controls in place to combat financial crime and fail to customise solutions provided by external consultants, according to the FSA.
The regulator today published the findings of its review into small firms’ anti-financial crime systems and controls, which covered anti-money laundering and financial sanctions, data security and fraud controls.
The review started in April 2008 and looked at 159 small firms across the retail and wholesale sectors.
The review identified that a number of firms’ financial crime systems and controls have weaknesses in some areas.
The FSA says few firms have appropriate due diligence systems in place to identify or deal with higher risk customers or situations.
Of 42 IFAs visited, 17 had monitoring systems in place capable of identifying suspicious activity, but only nine of these had effective procedures for managing hits on these systems.
The FSA says the majority of firms rely on policies and procedures that have been prepared by consultants, which in a number of cases are not tailored to their business.
It says 52 per cent of the IFAs surveyed use consultants to produce policies and procedures, but these had generally not been tailored by the senior management of the firms.
The FSA found many small firms do not have appropriate formal vetting and referencing procedures for staff and small firms need to do more to meet their fraud risk obligations.
Less than half the firms visited carried out full background checks or referencing before appointing staff. The majority of these firms indicated that their employees were family or close friends or had been referred by a known and trusted associate.
The regulator says generally, small firms remain weak in their knowledge and implementation of the UK financial sanctions regime.
In its work on mortgage brokers, the FSA singled out sole traders as groups that find it particularly difficult to make sure they a have the right systems and controls in place to meet regulatory requirements.
FSA head of financial crime Bob Ferguson says: “Collectively small firms can pose significant risks to the FSA’s statutory objective to reduce firms’ vulnerability to financial crime. It is important that small firms understand what their responsibilities are in this area.
“Firms should use the guidance we have provided to ensure that they mitigate the risks from financial crime.”
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Readers' comments (27)
Julian Stevens | 24 May 2010 12:43 pm
But blowing £16m on external consultatancy exercises or paying £20m in unearned bonuses, resulting in a £14m overdraft is good fiscal jurisprudence, is it?
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Anonymous | 24 May 2010 12:59 pm
Time to regulate external compliance consultants?
Many firms have reported financial crime but nothing is done about it because the claimants can say anything they like with complete impunity.
The banks had all the 'systems and controls' the FSA required but they still fell over.
Is regulation actually doing anything positive for the UK?
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Anonymous | 24 May 2010 12:59 pm
A reasonable person would be forgiven for concluding that the payment and acceptance of £20,000,000 of unearned bonuses was indeed a financial crime worthy of investingation, however when the "investigation" is carried out by the alleged perpetrators, whats the point ?
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Baron Bolligrew | 24 May 2010 1:00 pm
Of course it is Julian...remember, 'Do as I say, not as I do'!
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Anonymous | 24 May 2010 1:06 pm
Problem is that FSA have failed on many issues and most of their 4 Statutory Objectives - reducing scope of financial crime being just one of them. FSA needs to up its credability with the public and looking at IFA's systems and contols in Financial Crime is a 'soft target' and one that is likely to yield results. Likely to see some fines in this area in the near future!!
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Phil Castle | 24 May 2010 1:10 pm
I do believe in this country we live in it is supposed to be innocent until proven guilty..... Evidence of financial crimes that small firms have missed please as all systems and controls are supposed to be proportionate.
From experience, most banks systems and controls are now massively worse than when I was in branch banking over 20 years ago.
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Mr Smug | 24 May 2010 1:17 pm
How many financial crimes have been committed through small firms?
The reason why small firms do not have specific systems is that they rely upon the fact that they can really know their customers, in ways that large IFA's, insurance companies or banks can never do.
Therefore suspicious activity is picked up instantly because the small IFA will know that something is wrong.
I suspect this is more effective than hundreds of box ticks and policies that no-one ever reads after their first day.
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snooks | 24 May 2010 1:39 pm
We are told by the FSA that small firms pose a significant risk as a locus for financial crime. I see no evidence to support that. I have worked in a small firm as a financial adviser for 26 years. I have never seen an attempt to launder money.
The idea of 'systems and controls' is alien to a small firm culture in which clients are well known to the advisers and their supervisors. These terms of reference are suitable only to larger firms. I do not believe that small IFA firms are easy targets for criminals-quite the opposite. I believe that few would try and virtually none get away with it. The larger the firm e.g a bank-the easier it will be--IFA's are NOt easy places to launder money-I belive it would be almost impossible. I would like to see the evidence from teh FSA which suggests otherwise and to be able to test it.
Money laundering does not take place in IFA firms-it takes place in builders merchants and used car sales. Is there some kid of restraint which can be placed on the never ending expansion of this regulator into areas which are unproductive but a terrible regulatory burden on the small regulated firm?
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Anonymous | 24 May 2010 1:49 pm
The FSA can prove a significant risk to the budget of small firms. Unlike the fsa small businesses do not have the luxury of spending £16 million per annum on outside consultants to ensure they carry out their duties.Bob Ferguson should publish evidence as to the financial crimes small firms have caused and whether or not this warrants spending vast amounts of money on something that may never happen. The fsa is trying to create a kind of financial utopia where no one is ever adversley affected.
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Incompetent Regulators Awards Team | 24 May 2010 2:21 pm
FSA = Lies FSA = Lies FSA = Lies
The FSA, FOS and FSCS staff have been legally recorded by my firm and they have failed in so many respects I am recommending to George Osborne to not only scrap the F-Pack but also check out the 'acting in bad faith' element of their work. this will give no ummunity to the staff for bad practice.
Whats good for the goose is good for the gander.......................
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