‘Maximum assistance, minimum interference’: FCA lays bare Financial Ltd risk failings

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Former Financial Ltd boss Charlie Palmer built an advice network that treated advisers as the end customer and failed to heed warnings about potential suitability risks, the FCA says.

The regulator has today issued a decision notice against Palmer for failing to ensure appointed representatives gave suitable advice to around 40,000 clients. It also wants to fine him £86,691.

Palmer has referred the matter to the Upper Tribunal.

Pension switching and Ucis

The proposed fine and ban relates to the period between 24 February 2010 and 20 December 2012 – after Palmer had been hit with a separate fine and final notice from the regulator over systems and control failings which led to customers receiving inappropriate pension switching advice.

The past business review into pension switching advice is ongoing and, although the loss to individual customers has not been quantified, the FCA says “high levels” of potential unsuitability have been identified.

The network is also carrying out a voluntary internal review of Ucis sales. As at 16 July 2015, 94 per cent of Ucis transactions (296 of 314) had been identified as potentially unsuitable.

No restrictions

Financial Ltd operated a “hybrid” network model whereby commission was paid directly to appointed representatives from product providers. The network received revenue through a fixed monthly membership fee.

According to a skilled person’s report ordered by the FCA, there were no restrictions on the business models of Financial Ltd ARs. Member firms were, therefore, “effectively permitted to follow their own sales process and use their own adviser tools…which [Financial Ltd] had not assessed as fit for purpose”.

In addition, Financial Ltd did not limit product recommendations to approved providers and marketed itself to ARs as offering “maximum assistance with minimum interference”.

The FCA argues that Palmer was responsible for creating a business structure and culture that put advisers, rather than those receiving advice, first, and failed to put in place adequate controls to mitigate the risk of ARs breaching its ‘treating customers fairly’ principle.

It says the “cultural focus” on ARs as end customers was directly responsible for the failings at the network.

“This culture created an environment which allowed poor standards of business to continue for a significant period of time,” the FCA says.

‘How will it benefit the IFA?’

According to the FCA decision notice, Palmer stated in the group’s 2012/13 business plan that the network’s goal was to double in size by 2016 in terms of both gross profit and member numbers.

In the same business plan, which Palmer presented to the board, he set a strategic priority for the network to “Focus on what the IFA wants and needs. This means not doing what we think is right for them, but doing what they ask us for (sic)”.

The strapline for the business plan was: “The year to focus on the IFA. Consider every decision and ask ‘How will it benefit the IFA?’”

And while the plan also stated the business model “would move towards customers and advice”, Palmer’s presentation to the board said: “In terms of the main business model, there are no major changes to the services offered.”

The FCA argues that while Financial Ltd’s business plan demonstrated “an intended significant shift in…focus to consumers”, this was not reflected in Palmer’s presentation to the board or in the implementation of the business model.

And while the regulator concedes Palmer was not responsible for Financial Ltd’s risk management framework and compliance controls, it says he should not have relied on the firm’s compliance and risk management directors to ensure risks were being identified and effectively managed.

“Mr Palmer therefore had a responsibility to take adequate steps to ensure that the material risks in respect of underlying customers which arose from the business model that he had developed were being effectively managed…that he and the board were aware of and understood the risks, and that he and the board received sufficient, relevant and reliable information and valid assurance that the controls and mitigating measures in place were effectively controlling or mitigating such risks,” the FCA says.

“Mr Palmer failed to take such steps.”