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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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There are 23 comments at the moment, we would love to hear your opinion too.

  1. Hector Sants is no more than a playground bully, and with any luck he will receive his comeuppance like any bully does.

  2. 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.

  3. Sounds very much like a sales pitch for a network to me!

  4. Anon 4.34pm. I never back down for bullies.

  5. 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…

  6. 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

  7. ” A life lived in fear is half a life”

    Keith is absolutely correct don’t be afraid be prepared that makes much more sense

  8. Anon 5.14pm. David & Goliath my friend.

  9. 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.

  10. 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.

  11. I would rather live in cloud cuckoo land than live the half life of the anonymous blogger living in fear of the FSA

  12. Well said, Mr Bamford!

    I fear Mr Sampson is being a little misleading again: “I act for 4 separate IFA firms who are currently in FSA Supervision” would, if read literally, mean “I act for 4 FSA-authorised clients” as all firms are supervised (though by different strategies, dependent upon various factors including size).

    My reading of the UCIS report he refers to informs me that there are a large number of firms who engage service suppliers without particularly rigorous due diligence. This can never be a wise course of action, and I would suggest that people who do this must accept the attendant risk. Bear in mind, in this particular area, that the requirements are set out in primary and secondary legislation rather than regulatory rules; consequently anyone who hires a consultant without legal expertise to advise on them is being somewhat reckless.

  13. @Adam Smith

    “Set out in primary and secondary legislation…”?

    Not so.

    s.238(1) prohibits the promotion of collectives. Subsection (5) dis-applies this if you follow the FSA’s rules….and the FSA’s rules are…?

    I assure you Adam that I have a modicum of legal training and am very familiar with the current legislation, its predecessor (s.76, FSA 1986) and indeed am one of the few saddos who has studied the clause-by-clause discussion by Commons Standing Committee A of the passage of the current Act.

    That’s why I can tell you that FSA’s junior staff bend what the legislation says, and bends further the requirements around the exemptions.

    And that’s why when you challenge their understanding, they have to go and stand outside and ring the Office before they can answer the question…

  14. Well said man in black!
    I believe your take on the situation is most likely to be true.
    The FSA are a law unto themselves.

  15. Why were Tenet silent over RDR - the answer is her 8th September 2010 at 7:41 pm

    Question: Ever wondered where the voice of Tenet was when it came to RDR?

    Answer: They were silent because Tenet are beneficiaries of RDR.

    If Tenet lose half their members they lose 12 -15% of initial commission but gain 100% of trail.

    Even their PI pays Tenet and not the former members with a subrogation clause that allows their PI insurer to seek repayment from former members for any PI claims met.

    You guys don’t even have PI! Tenet also has personal guarantees on all your assets (don’t tell your wife) and will be quite happy to pay off any complainant rather than fight your corner.

    Before RDR £100K T/O £50K initial £50K trails = Tenet take £15K
    After RDR £50 trail = Tenet take =£50K = resulting in lack of opposition to RDR and the forced loss of half of their membership!

  16. Do not believe what the networks say. More than 10 yrs after leaving one I am whacked another fine. Laughable the details (limited as they are because they will not let me see the file) of the FOS case. They do not defend me and I have to pay-sucks! But that is my contract. Case was brought by ‘ambulance chaser’. At the moment I am trying Data Protection Act to have the details released. The network tell me in an email- “it is not my business” (their words)-so who’s business is it? I am not holding my breath been over a year now since I filed the request and they have a backlog. I tried to get the details from FOS under Freedom of Info I am informed that they do not fall under the Act- how convenient! Understand they will do so soon- so that’s another request going in. And the complaint industry of the UK roles on.

  17. Former Network member 9th September 2010 at 11:05 am

    Keith Richards is a Rolling Stone of a Network that gathers no regulatory moss – not the same for the Network members who need to be very affraid.

    The world of directly regulated IFA is made up of former Network members who have seen through Networks. If you are affraid of regulation then you need to be very affraid of regualtion via a Network such as this Rolling Stone!

  18. I agree with Paul Bear - Be afraid of Networks be 9th September 2010 at 1:25 pm

    Paul Bear sound a warning note to all Network members. Do not fall into the trap of thinking that a Newtwork offers you one jot of protection. A network member can’t ebven contact the FOS over any complaint made about him/her. Be afraid of Networks be very afraid.

  19. A network is ‘prepared’? What a novel idea.

  20. Our compliance people usually inform us of new regulation after we have already implemented it.
    Recently we have begun to look at the whole compliance deal we are signed up to and have decided that we are not convinced they are any more capable than we are.
    On a recent visit our compliance officer said that the director of his company was very pro FSA as without them advisers would not be so afraid. and would not therefore make as much use of compliance firms.
    It really makes me sick the way so many people are living off the backs of IFAs.

  21. “Newtwork”, a Fruedian slip? I am inspired by it!!

  22. Having read Keith’s comments I wondered was this the same senior manager of Royal London when I worked for them.
    Driving industrial biased sales,churning of business and lack of training for sales staff. 12 months retraining for all staff with no sales to be made.

    Short memory Keith — ‘be afraid be very afraid’

  23. Yes definately the man !!
    Royal London have gone from strength to strength since finishing him !!

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