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Financial services regulation and ethics


Advisor firms pick a path

Fay Goddard

As we approach the end of the first post-RDR year, there are still some aspects of the rules  that were subject to continuing interpretation and debate. Most vexing has been whether the regulatory hurdle of maintaining ‘independent’ status is achievable – or even desirable. The FCA issued guidance in June 2012 but many firms sought further clarity, leading the regulator to modify the guidance in May 2013.

Despite this, more large firms and networks – networks in particular – have announced a restricted-only proposition since the publication of the outcome of the FCA’s thematic review into RDR implementation was published in July 2013. This extract from the review helps to explain why:

“We visited a few firms where advisers described themselves as independent, but we had concerns about the validity of the claim. We found examples of the situations where we considered firms may not be independent in practice where:

• almost all business being placed with one platform; and
• having a pre-determined list of products or investments.”

The FCA has also been unequivocal in its view that independent firms need to ensure that their advisers are competent enough to recognise and understand a wider range of investment products than before, even if they are never likely to recommend them. This places an additional training burden on the firm and advisers.

For any large firm where an increasing number of advisers are opting to go restricted, rather than face tougher compliance and training requirements, it must be asked to what degree their services restricted. There is likely to be a range in most networks, from truly independent to ‘restricted whole of market’, to recommending a narrow range of products. This creates difficulty in setting and monitoring consistent and appropriate compliance and T&C regimes.

But allowing AR firms to select their own restricted service could also make a common approach to administration and monitoring difficult. A firm must disclose that it provides restricted advice and also the nature of that restriction. Arguably, it is easier to disclose a defined proposition than to articulate what a firm doesn’t provide.



Learning from the mistakes of others

Rebecca Prestage

Almost every week there is news that the Financial Conduct Authority (FCA) has fined yet another firm for failing to adhere to their ever-more interventionist rules and regulations.

But what can the average, smaller firm, not involved in any illicit activity, actually learn from the fines brought against firms in the past eight months? In every case, the FCA has attributed failings to non-adherence to their statutory objective: consumer protection. Consumers have been affected directly by firms’ failing to ensure that consumers get fair and positive outcomes from the financial products that they are recommended. In all of the fines failings can be attributed to the following:
Inappropriate processes and procedures, such as:

•    Aggressive sales strategies.
•    Failure to give customers appropriate levels of information.
•    Inadequate and inconsistent investigation of complaints.
•    Failure to investigate the root cause of complaints.

Failure to ensure suitability, including:

•    Inadequate assessment of customers’ attitude to risk and appropriate matching of recommended products.
•    Not ensuring that customers could financially manage poor returns on investments.
•    Insufficient gathering of KYC information.
•    Customers not advised about product charges and the affect they can have on their investments.

Inadequate systems and controls, for example:

•    Improper records and record-keeping.
•    Failing to identify emerging issues.
•    Failing to monitor issues or provide adequate oversight in areas of high-risk.

In all of these cases, the failures were avoidable. What this really comes down to is ensuring that your governance and culture is effective. There is a need to set the tone from the top and filter this through your business model, organisational structure and systems and controls to ensure that consumer-centricity permeates throughout the whole organisation. The FCA has demonstrated that it will be holding firms and individuals to account for their actions, so firms should take this opportunity to learn from the mistakes of others.


Crowdfunding borrowers and the FCA

Charlotte Mannouris

Last month we looked at crowdfunding regulation from the lender’s point of view. This month focuses on protecting borrowers.

Crowdfunding has been one of the success stories of the past few years. For investors looking to secure a better rate of return on their money than the paltry offerings of banks and building societies, crowdfunding websites put people with money to lend in touch with those wanting to borrow.

Until now there has been little regulation around this sector of the peer-to-peer lending industry, but this will change when the FCA assumes stewardship of consumer credit in April 2014. The new rules will include specific guidance relating to crowdfunding, making sure that those who borrow money using this method are adequately protected, and putting so called ‘peer-to-peer lending’ on a level playing field with other forms of borrowing.

In Consultation Paper CP13/7, the FCA indicates that it will expect providers to carry out some sort of assessment of the credit-worthiness of prospective borrowers. This is a clear sign that the regulator intends to treat crowdfunding websites in a similar fashion to other lenders, as opposed to advisers or comparison sites. It also plans to include a 14-day cooling-off period that will allow borrowers to withdraw from the loan agreement, either orally or in writing, if they change their mind – and without having to say why.

Before a loan agreement is made, peer-to-peer lenders will have to give borrowers an explanation of the key features of the loan, describing the risks involved. As with other forms of secured credit, lenders will also have to provide a specific warning to a borrower if the loan is to be secured against their home. Although there is no mention in CP 13/7 of how providers are to handle borrowers who experience financial difficulties, the FCA will expect peer-to-peer lenders to provide information about sources of free and impartial debt advice to borrowers who are behind with their repayments.

The crowdfunding market is buoyant and is expected to see significant growth in the near future. It can deliver practical solutions to both borrowers and investors. The new regulations around this increasingly popular source of credit are timely and sensible.


Asset managers in the sights

David Smith

The FCA has published the results of its thematic review on the risks of asset managers using outsourced service providers, highlighting two outsourcing risks that could adversely affect consumers: resilience risk and oversight risk.

Resilience risk relates to the ability of an asset manager to continue servicing its customers in the event a service provider fails. In such circumstances, a viable contingency plan is crucial to minimise the impact to customers. The review showed that the sample firms were not prepared for a service provider failure. Although they had contingency plans in place, these were either under-developed or designed to cope with temporary disruptions instead of outright failure.

To ensure compliance with SYSC 8 firms should:

•    Consider how the service could be maintained during transfer to a replacement provider.
•    Form a relationship with a stand-by provider in the event a primary provider fails.
•    Maintain a detailed understanding of the operational exposure to the service provider.
•    Identify what outsourced activities are critical to ensuring a basic level of service.
•    Monitor the service providers financial position to pre-empt any potential failure.
•    Know where and how the essential activities are performed, and their frequency.
The review also considered oversight risks, and how a failure by asset managers to properly oversee their outsourced service providers could disadvantage customers. The FCA views the ability of asset managers’ staff to effectively oversee service providers as a crucial factor in meeting its outsourcing rules. In some cases, firms appeared to be over-reliant on the service provider’s own expertise and controls. The FCA has recommended that asset managers with outsourcing arrangements:

•    Enhance contingency plans for dealing with the failure of a service provider that handles critical activities.
•    Assess the effectiveness of existing oversight arrangements and ensure suitable expertise is in place.



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