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Carl Wallis: Advice cowboys will meet their match

The Senior Managers Regime represents a shift in focus from the regulator, with a broader risk outlook encompassing both regulated and unregulated business

The FCA has recently published its consultation paper on extending the Senior Managers and Certification Regime to all firms it regulates.

The paper offers some clarity on how firms and business leaders will be affected by the changes. However, it does not set out how the regime will apply to approved persons of appointed representatives (principal firms remain responsible for ensuring ARs and networks comply with the rules).

This means around two-thirds of advice firms will have to wait until later in the year to find out how the new rules will affect them.

The FCA has been making its position clear for some time that one of its main aims for introducing the regime to all regulated firms is to strengthen the accountability and responsibility apportioned to decision-makers.

But a key issue decision makers and business owners may not have fully appreciated is that the new rules, by which all senior managers must abide, will cover both the regulated and unregulated financial services activities of a firm.

The FCA has previously alluded to the fact its expectations of senior managers may extend beyond the confines of regulated activity. Within the consultation paper on its future mission statement issued late last year, chief executive Andrew Bailey pointed out the lines between regulated and unregulated activities have become blurred in recent years.

He commented that many problems seen in the market: “…have been caused by regulated firms undertaking activities which are outside of the ‘regulatory perimeter’… Our objectives, to varying degrees, gives us power to intervene in many of these activities… We will prioritise intervening when we believe our objectives are threatened.”

Leaving aside for one moment the obvious debate over whether such an approach oversteps the regulator’s remit, in many respects this does make good sense.

It could be argued that regulated and unregulated services offered by firms are inextricably linked. For example, processes used by firms to deliver unregulated and regulated mortgage advice are often identical. Similarly, many firms that offer will writing services will also provide the same clients with product recommendations in relation to inheritance tax advice; the provision of which in itself is also unregulated.

Senior managers who demonstrate the appropriate level of ethical standards expected by the regulator are unlikely to let those standards slip on certain elements of their firm’s services, simply because these fall outside of what they believe to be the regulatory perimeter.

But recent history is littered with examples where the wider adviser community has picked up the bill for a small number of firms operating inappropriately on this “perimeter”.

The lion’s share of Financial Services Compensation Scheme interim levies heaped onto advisers in recent years are attributable to unregulated services in some way, whether it be inappropriate Ucis schemes arranged via Sipps or offshore property investments bought using capital raised from remortgaging the main residences of customers.

Such examples not only serve to highlight the obvious dangers of authorised firms carrying out some types of unregulated financial services activities but they also illustrate an important conduct risk issue: authorised individuals are perhaps most vulnerable when they believe they are not liable under the regulatory system for elements of the services they deliver.

This misapprehension encourages higher levels of risk-taking, which can mean such negative consequences for the rest of the adviser community in terms of both industry reputation and the cost of doing business.

This is why the FCA’s move to extend its new conduct rules to all financial services activities a firm undertakes should be welcomed. Integrity is, after all, a personal characteristic that cannot simply be switched on and off.

For too long the issue of firms taking large risks on unregulated business has been left to fester unresolved and unchallenged. In too many cases it has resulted in huge detriment for the customers involved and the rest of the industry has been left to pick up the pieces.

It is imperative that action is taken on this issue if the industry is to stem the tide of damaging publicity and spiralling regulatory costs. It is therefore extremely encouraging to see the FCA appears to be prepared to take such action and hold to account those who continue to push the boundaries when providing unregulated financial services.

Carl Wallis is head of compliance at Bankhall


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. Are there any instances of a firm being fully compliant on the regulated side but negligent/unprofessional/fraudulent on their other business?

    I don’t recall any and would be surprised if there were. In my view the statement in the article, “Integrity is, after all, a personal characteristic that cannot simply be switched on and off.” is spot on. Which, in my view, is why any extension to unregulated activities won’t make any difference. Rogues will be rogues.

    I am reminded of my wise old law teacher who said that makers of laws (and rules) are under the impression that proliferation of these solves problems. In practice they are political acts with little basis in reality, tending to impact law-abiding citizens through complexity and cost rather than troubling the determined criminal or negligent person who cares not.

    When you get to the point where making more rules and laws do more damage to the law-abiding than the law-breaking you need to stop. That’s when you devote your resources to active prevention and detection. I fear we passed that point some time ago and it was missed…

  2. @Grey Area – I couldn’t agree with you more.

  3. How does the FCA propose regulating unregulated activities (presumably such as selling unregulated products) when its GABRIEL system doesn’t even ask about them? And how does it propose regulating ANYTHING that unregulated firms do?

  4. @ Julian Stevens

    Is it possible for you to respond to a comment without dragging Gabriel returns into it.

    The system is currently time consuming enough without having to declare every type of poicy sold.

    Having said that, as you are an AR of a Network, you dont have to complete one so it is easy for you to harp on about it. I am sure if you were personally required to complete returns, you would soon shut up.

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