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Shame is the spur

Research shows that our new year’s resolutions tend to be about becoming better people through gym memberships, less beer and fewer fags, more charitable giving and becoming more financially astute but it is interesting to look at one of the FSA’s priorities for the new year.

This is to change indiv-iduals’ behaviour in the financial service arena through imposing personal enforcement action against people in the industry. More open communication is intended to make it publicly known what is acceptable to the regulator and what is not.

Naming and shaming senior management who fall foul of the rules will, the FSA believes, lead to an improved complaints ethos and culture within financial services.

FSA policy states that naming and shaming will happen where a senior manager is personally responsible for compliance mistakes or where his or her working practices fall beneath an acceptable standard.

Two recent cases involved IFAs and both senior managers accepted the FSA penalty without seeking redress through a tribunal. Their breaches related to the FSA principles and money-laundering source book as well as general compliance failings, such as apparent lack of control over precipice bond sales, not undertaking sufficient compliance visits to advisers’ offices, inadequate complaint handling and a lack of the required written compliance procedures.

Be aware that both of these individuals were managers of small firms, not big conglomerates. Admittedly, with the favoured “flat” management structure in product provider companies, it is harder to assign individual blame when things are found to be non-compliant as responsibility is less clear-cut.

Naming and shaming can lead to a real loss of credibility for individuals who are financial advisers by background but do not have sufficient resources to recruit non-income-producing back-office staff to bolster the compliance function. Don’t get me wrong, I truly believe that every firm should have common standards of compliance that are adhered to. Having been head of compliance for a few well known organisations, once the required procedures are agreed and written, it is relatively straightforward to meet the standards.

Quality compliance consultancies exist which have ready-made compliance procedures and then can be tweaked to meet a firm’s needs. It is worth paying the consultancy fee to avoid seeing the regulator’s enforcement teeth.

The FSA has also looked at its own internal procedures. With mandatory electronic reporting for all firms, the power of the portals, straight-through processing and the importance of a rigorous, seamless back office, financial services technology has finally come of age.

I therefore expected the regulator to beef up its IT capability while forcing the firms it regulates and authorises to do so.

A recent article by Will Hadfield in Computer Weekly caught my eye. Orbys Consulting were asked by the FSA to report on the state of its own IT capability to justify a two-year transformation that will cost up to 8.5m.

The review showed that while Orbys praised the personnel in the IT area for their technical skills, the organisation of the FSA IT function is “woefully inadequate”.

The proportionate cost of the IT department was more than twice the average of the companies it regulates. The cost-to-revenue at 17 per cent is one of the highest Orbys has ever seen, with the financial services industry averaging 6.87 per cent.

Of course, the FSA says it recognises that there is scope for improvement and action has been taken. Life would be so simple if those on the other side of the fence who are running scared through the fear of receiving a regulator fine or being named and shamed (and they will remain unnamed) were able to ask for a two-year space and a huge budget to put matters right.


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