Adviser network Financial Ltd faces making massive payouts in redress after the FCA found “systemic weaknesses” in its systems and controls.
Last week, the regulator banned networks Financial Ltd and subsidiary Investments Ltd from recruiting appointed representatives and individual advisers for four-and-a-half months.
The FCA says were it not for the firms’ financial positions, it would have imposed a £12.6m fine on Financial Ltd and a £621,583 fine on Investments Ltd. Financial Ltd has 299 ARs while Investments Ltd has four. Investments Ltd also has discretionary permissions.
The regulator found the firms did not take sufficient steps to assess prospective ARs’ business models and failed to adequately supervise advisers once they joined the network to minimise the risk of misselling.
The FCA has ordered the firms to conduct past business reviews in relation to pension-switching recommendations and the promotion and sale of unregulated collective investment schemes, which may result in redress being paid to consumers.
The regulator says between 20 August 2008 and 30 April 2013, Financial Ltd sold 322 Ucis funds to 252 customers. Of these customers, up to 80 per cent may have received unsuitable advice.
At its peak, Financial Ltd was responsible for 400 ARs and 500 individual advisers, who gave advice to over 60,000 customers – all of whom the FCA says were exposed to a “significant risk” of unsuitable advice.
Clarke Willmott solicitor Laura Hazell, who is acting for an investor in a Ucis claim against Financial Ltd, says: “There are specific procedures and requirements surrounding the sale of Ucis and unless complied with properly, the product risks being unsuitable.
“My client’s file suggests even where Financial Ltd identified the adviser had not complied with regulatory requirements, nothing was done. Based on a loss of approximately £50,000 per unsuitable Ucis, Financial Ltd could be looking at £10m in Ucis redress. The FCA also points out that overall 60,000 customers may have been exposed to a risk of loss. If even half those claim, [the firm] could face liabilities worth hundreds of millions of pounds.”
The FCA says Financial Ltd gave its ARs and advisers a high degree of flexibility and created an environment that allowed poor standards of business to continue for a significant period.
It says the failings were directly attributable to the firm’s culture which viewed the ARs and individual advisers as the end consumer rather than their clients.
The regulator found ARs were allowed to follow their own sales processes and use their own tools, including risk-profile questionnaires, without Financial Ltd assessing if they were fit for purpose.
The frequency of supervision was not driven by the actual risk an adviser posed to customers. For example, the results of pre-sale checking did not influence advisers’ risk rating.
The regulator found file checking was not consistent and the network’s grading system for post-sale file checks was ineffective because there was no clear definition of unsuitable advice.
FCA director of enforcement and financial crime Tracey McDermott says: “This is the first time the FCA has used its suspension or restriction powers to punish a firm for serious misconduct. The sanction serves as a reminder that the FCA takes systems and controls failings seriously and is able to respond with sanctions that target specific revenue streams.”
In 2010, Financial Ltd director Charles Palmer was fined £49,000 for management failings which resulted in poor compliance monitoring of pension switching advice.
Financial Ltd and Investments Ltd chief executive Brian Galvin says: “We respect the FCA’s findings and regret we fell short of expectations. We have co-operated fully and have introduced new controls and significant changes to processes and systems to address the FCA’s concerns.”
Financial Ltd refused to comment on the potential figure for redress.
Networks must get the right advisers through the door
The size of the potential fine for Financial Ltd, at £12.6m, demonstrates how seriously the FCA views this lapse of control. Any network model carries a degree of embedded risk but firms can put in place appropriate systems and controls to mitigate that risk.
However, it is the culture within an organisation that drives behaviour. And if a firm is letting the wrong people through the door, that culture will be affected negatively, which is difficult to change through systems and controls.
There is little point in the regulator imposing a fine on a firm that does not have the means to pay it but by publishing what the fine would have been the FCA is sending a strong message to the industry about how serious this is.
However, I do not think in any sense that this is a typical network. My own experience suggests the networks are increasingly diligent and cautious about the people they recruit to ensure they are fit and proper. Networks want to recruit the right people who will drive the right culture and the right outcomes.
Malcolm Kerr is a senior adviser at EY financial services
Justin King, chartered financial planner, MFP Wealth Management
If these poor practices were going on between 2008 and 2013, why did the FCA not take action sooner? This makes me question what the regulator does with all the data it collects from firms.
Alan Nedas, principal, Alan Nedas Associates
The lack of checks the firm had on recruiting advisers is frankly ridiculous. There must be a common standard that every adviser is working to. But it is welcome to see the FCA is not afraid to use its suspension powers where necessary.