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An oversight by the FSA

Six months on, N2 is coming home to roost. In its rush to impose the new regulatory regime last December, the FSA faced the thankless task of telling us how the changes would affect us.

Not surprisingly, it failed to get beyond the headlines and it is only now that the ramifications of some aspects of the new regime are beginning to unwind.

At first glance, the revised approved persons (controlled functions) regime seemed to expand substantially the number of roles within a regulated firm that were to become subject to more scrutiny by the FSA.

There is, however, one glaring hole in the centre of this new system which calls into question the validity of the logic being applied by the FSA in seeking to move the emphasis from corporate to individual responsibilities.

Astonishingly, it affects the role of the compliance officer. It seems the FSA attaches far less importance to the compliance officer than most commentators would.

As the noose of regulation has gradually tightened around the necks of regulated firms over the last 15 years, the role of the compliance officer has come to be recognised by responsible chief executives and financial advisers alike as one of dependability.

The knowledge that the compliance officer&#39s hand is controlling the rudder of respectability and assisting with the maintenance of the high standards that today&#39s investors demand is reassurance indeed for beleaguered management teams.

It was a surprise then that the FSA revealed the new CF10 role of compliance oversight would ordinarily be expected to be the responsibility of the chief executive of the organisation. Should the roles not still require a compliance officer or compliance director?

In fact, the very title of the new role, compliance oversight, conjures up visions of less important activities. Surely these activities cannot be that crucial to a regulated firm if someone simply has to oversee it?

Central to the issue of the usefulness of compliance within an organisation has to be that of the effectiveness (and therefore also, one assumes, the respectability) of the individual ensuring investor protection within the firm by controlling the compliance function.

Logic dictates that for a firm to comply with the senior management systems and controls requirements set out in the FSA&#39s high-level standards sourcebook, it must be the case that the person acting as compliance officer should be central to these controls.

In practical terms, the compliance officer should be very much involved for the majority of regulated firms in designing an appropriate structure.

Why is it then that the FSA has chosen to demean the role of the compliance officer at a time when it is stepping up its regulatory demands? Is it because the FSA does not value the compliance role?

We have known for four years they took the stance that, by default, the chief executive was responsible for the compliance affairs of the regulated firm, so the FSA is happy to know where the buck stops.

The issue that must be central to the thinking under the present system is likely, in my opinion, to be the prickly one of the competence of the compliance officer.

There is more than a small degree of irony attached to the fact that the compliance officer who, after all, should be the primary driver of the compliant business environment, is not subject to the training and competence regime.

The person responsible for ensuring that the rules are adhered to does not, under the present regime, have to demonstrate any understanding of the actual rules themselves. Neither does he or she have any obligation to keep up to date with any developments that drive the regulatory changes that shape the new compliance rules. Nor to keep up to date with the FSA&#39s consultations. Is there a pattern developing here?

“The difficulty that we would have would be in objectively setting the standards expected,” I hear you say.

Well, the best place to tackle the problems that may arise in determining the appropriate skills for compliance officers would be to establish a benchmark qualification.

How many companies, of whichever discipline, place their finances in the hands of a non-accountant? How many listed companies have chief financial officers who are not chartered accountants?

Everything is relative of course and those of us who earn a living within the compliance arena are quick to point out that this profession is very young.

Accepting the relative youth of the compliance profession, it is nevertheless the case that now must be the best time, while still in its infancy, to shape and define what the financial services industry wants on a whole from its compliance practitioners.

And what of the FSA?

Having recently started consulting on the issue of codifying and possibly rationalising the different qualifications of financial advisers, to assist consumer understanding, should they not now begin work on a framework for the requisite skills to operate within compliance?

I have heard of no such suggestion. Instead, we have different bodies such as the LIA, the CII and the Compliance Institute each developing their own ideas along these lines.

The concept of self-regulation still exists but with little or no guidance regarding the guiders. And will we see the FSA enforce higher, albeit undefined, standards upon compliance practitioners or those fulfilling the CF10 function by including them within the scope of the training and competence requirements?


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