In November, the FCA published its Approach to Authorisation document, containing feedback on its December 2017 consultation paper on the same topic.
It is a very useful and detailed account of how the regulator determines applications for authorisation by firms and for approval by individuals, as well as how the new senior managers regime may impact on the current approach.
The very short section on phoenixing attracted a lot of attention in the advice community. Advisers, quite understandably, get frustrated when individuals from firms that have caused significant consumer harm re-appear quickly at others, often having purchased assets from their previous, failed business.
Not only does this harm the reputation of the reputable, professional adviser, it also has a real cash cost in terms of Financial Services Compensation Scheme levies.
The paper was short on detail but did indicate the FCA would be looking to “strengthen the quality and timeliness of the data” gathered on firms and individuals and “obtain relevant intelligence” when making decisions on authorisation and approvals.
It is important to recognise the FCA does not and could not seek to run a zero-failure regime. The only way to do that would be to authorise no businesses at all. The frustration in the advice community often arises from a perception of missing obvious signs and being too slow to act, and in doing so exacerbating the level of harm caused.
While the FCA does not go into detail on the “enhanced intelligence” it intends to gather, there are some clear steps and questions it could take in this area:
- Alter FCA rules/guidance to make it a notifiable event when a firm or individual is intending to purchase or transfer assets from a firm with which they have previously been associated, particularly if that firm has been able to meet all of its obligations to clients and/or there are signs it has not met all its obligations under the regulatory system, this would allow the FCA to scrutinise the firm more closely and could help identify issues earlier.
- If an individual is applying for approval as a director at a new firm (or authorised representative) while still at another firm, again this could go into a process requiring additional scrutiny and/or specific questions could be asked around the reasons for the “dual application” and/or if it is connected with a proposed transfer of assets/clients.
- The regulatory returns of the firms involved in such applications could be subject to closer scrutiny. The FCA now collects a huge amount of potentially useful data and a system should be able to be developed which uses this data to flag up risk factors.
- Use should also be made of Companies House records of the individuals involved – for example, around the timings of registration of new companies and directorships.
While there may be perfectly innocent explanations in many or even most cases (individuals can often apply for approval at a new firm while still at their old firm), it should be possible to implement systems which quickly identify higher risk cases. If those initial steps can be taken with limited human input, the FCA’s limited resource can then be focused on the higher risk cases.
Preventing harm and poor conduct will, of course, never garner as much attention as the spectacular failures of often relatively small firms that seem to cause a disproportionate amount of harm, but the FCA should monitor the success of its new approach and not be shy of publicising any successes it has in stopping firms or individuals from becoming authorised.
It will almost certainly have to do this anonymously but it would give the adviser community confidence it is starting to focus on asking the right questions at an early stage.
The senior managers regime may also act as a deterrent to poor conduct if individuals think that the consequences of poor conduct are more acute. That said, if you are from a smaller firm, it has never been that difficult for the FCA to be able to enforce personal accountability, so the new regime may not make as much difference in that part of the sector.
Even if they didn’t prevent poor conduct, some of the procedures suggested above could also provide information relevant to later investigations showing an individual misled the FCA when applying for authorisation or approval. The more specific the questions asked at the time, the more difficult it is to justify answers given in the light of subsequent events and, again, this could act as a deterrent to poor conduct.
I am optimistic the FCA is finally starting to grasp this nettle and look forward to updates on its progress.
Alan Hughes is partner at Foot Anstey LLP