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Held to account

Robust systems and controls are at the heart of a firm’s governance regime and with the FSA placing a greater emphasis on people holding controlling functions, it is important to ensure that they are in the right roles

Nick Kelly
Nick Kelly, managing director, Bankhall

It is important to spot emerging trends as early as possible so that adviser firms can take the right preventative actions. A good example of this is the FSA’s increasing focus on its credible deterrence approach, which enables the regulator to maintain its effectiveness in enforcing identified compliance failings within a firm.

The FSA maintains that credible deterrence is about the delivery of outcomes that make a positive difference to consumers and the marketplace. The use of a more intrusive supervisory approach and resulting higher fines is designed to make management and individuals accountable for their actions, for example, they break the law, are in breach of regulatory requirements and if they do not improve upon any deficiencies in their existing poor systems and controls. In addition, the FSA aims to ensure that individuals are deprived of any financial benefit gained as a result of breaching its rules.

The FSA is clearly very serious about taking a more intrusive approach regarding firms’ activities as the fines levied during 2010 almost trebled compared with those levied the previous year, reaching nearly £89m. While a number of the bigger fines were directed towards investment banks, retail firms also came within the FSA’s sights.

Where compliance failures are identified within a firm, the level of the fine imposed by the FSA will take into account the financial benefits the firm has derived from the product or failed business area, together with the nature, impact and seriousness of the relevant breach. When imposing a fine, the FSA will want to ensure that it reflects the seriousness of the offence, has the appropriate deterrent effect and that it sends a clear message to the financial services sector that it will not tolerate this type of behaviour.

From the beginning of 2011 to date, the FSA has fined 18 firms a total of £15.4m for a number of compliance failings. The common areas of failure are in relation to issues around the suitability of advice being provided to clients, mortgage fraud as a result of submitting fraudulent applications and failure to handle customer complaints appropriately.

As a result of these failings, the FSA is now expanding its scope when considering who is accountable not only to identify those who are collectively responsible within the firm but also to ensure that those who hold control functions are in no doubt as to their individual responsibility for failings within their area of control.

We are now seeing more cases where the FSA is taking action against the firm and those individuals captured within the director (CF1) and partner (CF4) functions, in addition to focusing on the individuals performing the compliance and oversight function (CF10) within those firms. These individuals are being held personally accountable for the failure of the firm’s systems and controls within their remit.

The FSA aims to ensure that individuals are deprived of any financial benefit gained as a result of breaching its rules

In view of this, it is essential that firms take appropriate measures to protect themselves. Of course it is not a one-size-fits-all approach and the right solution will depend on the size and shape of each individual firm. However, there are certainly some scenarios that can help to illustrate the issue.

Recruitment is one example that is particularly relevant to bigger adviser firms. In this regard, it is essential that firms take every available measure to ensure the right individual is recruited for any function with significant influence. In some recent cases, the FSA has identified that the recruitment processes currently in place at some firms are not effective enough to enable them to identify that the individual can fully demonstrate competency and capability and is therefore “fit and proper” for the requirements of the CF10 role.

That this competency is not being determined and demonstrated at the outset is causing the FSA some concern. Questions have also been raised regarding how individuals holding CF10 are maintaining and developing their knowledge in line with the firm’s business model and the regulatory requirements. The FSA has identified a number of serious gaps in how “fit and proper” in addition to ongoing competency and capability are being monitored, tested and recorded.

The CF10 function is a significant influence function and therefore should be undertaken by either a director or a senior manager within the business as the responsibilities of the role requires oversight of the firm’s compliance arrangements and reporting arrangements to the relevant “governing body”.

This individual must have the necessary authority, resources and expertise in order to make the function effective. It is not appropriate for firms to recruit what would be considered to be “junior compliance officers” as they will only be able to demonstrate experience by undertaking day-to-day compliance activities.

Clearly, this is a stark message being delivered by the FSA and it is important that both compliance officers and firms alike take note of this new approach and test their recruitment procedures accordingly.

Firms need to consider carefully both their current recruitment process and also their ongoing monitoring and assessment of the competency and capability of individuals to ensure they can be deemed ’fit and proper’ to perform CF10 roles.

Only that way will firms make absolutely certain that they will not run the risk of falling foul of the regulator on this important issue in the future.


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