In August, the FSA fined an IFA firm £17,500 for not disclosing relevant information about an adviser employed by the firm. According to the FSA, this led to an unacceptable risk of custo- mers being recommended unsuitable mortgages.
After the firm had applied to the FSA for the adviser to be confirmed as an approved person, a director of the firm became aware that the adviser’s previous employer had suspended the adviser because of concerns about his business methods.
He raised these concerns with the adviser and concluded that the adviser had lied to him about why he had left his previous employment. Unfortunately, the director then failed to disclose this significantly adverse infor-mation to the FSA.
Despite being aware of the concerns of the adviser’s previous employer and of the adviser misleading him on these matters, the FSA highlighted the director’s failure to:
- Exercise appropriate control over mortgage applications submitted by the adviser.
- Consider whether it was appropriate, in light of indications that the adviser was not fit and proper, to allow him to continue giving advice on life and other products.
- Understand the risks associated with fast-track mortgages and as a result allowed the adviser to submit mortgages of this type to lenders.
This example highlights the importance of firms being able to prove the fitness and propriety of approved persons.
On October 12, the FSA wrote to all chief executives setting out its expectations on approving and supervising persons of significant influence functions or Sifs, which include all members of the senior management team from directors, including non-executive directors, down to the C suite, which means anyone with chief in their title such as chief executive, chief operations officer and chief risk officer.
The FSA’s regulatory philosophy and more intrusive approach continues to place a great deal of emphasis on governance and consequently the responsibilities of senior management in firms. In view of the shortcomings exposed by the financial crisis in the governance and risk manage-ment of some regulated firms, the FSA made changes last year to how it approves and supervises people performing Sifs. In particular, it introduced procedures to interview, at its discretion, candidates applying to perform certain Sif roles and placed greater emphasis on monitoring the performance of people already performing Sif roles. This includes reviewing more critically the competence of people performing Sifs as part of Arrow assessments.
The FSA’s yardstick for its expectations for people performing Sifs are set out in the statements of principle for approved persons in the FSA handbook and its assessment of the competence of Sif holders will be based on Aper.
Aper is further explained by the code of practice which complements the statements of principle, which themselves are very succinct.
The FSA has stated that one of the key questions it expects relevant senior management of a firm to be able to answer is, what are the circumstances under which the firm will fail? In assessing competence, the FSA expects senior manage-ment to be able to demonstrate their understanding of the inherent risks in the business/markets and to articulate what plans are in place to mitigate the risk of failure.
Looking directly at the statements of principle for approved persons, there are seven main principles to follow:
- Statement of principle 1 – an approved person must act with integrity in carrying out their controlled function.
- Statement of principle 2 – an approved person must act with due skill, care and diligence in carrying out their controlled function.
- Statement of principle 3 – an approved person must observe proper standards of market conduct in carrying out their controlled function.
- Statement of principle 4 – an approved person must deal with the FSA and with other regulators in an open and cooperative way and must disclose appropriately any information of which the FSA would reasonably expect notice.
- Statement of principle 5 – an approved person performing a significant influence function must take reasonable steps to ensure that the business of the firm for which they are responsible in their controlled function is organised so that it can be controlled effectively.
- Statement of principle 6 – an approved person performing a significant influence function must exercise due skill, care and diligence in managing the business of the firm for which they are responsible in their controlled function.
- Statement of principle 7 – an approved person performing a significant influence function must take reasonable steps to ensure that the business of the firm for which they are responsible in their controlled function complies with the relevant requirements and standards of the regulatory system.
The code of practice states that principles 1-4 apply to all approved persons and 1-7 apply to all Sifs.
Strategy and plans will often dictate the risk which the business is prepared to take on and high-level controls will dictate how the business is to be run.
If the strategy of the business is to enter high-risk areas, the degree of control and strength of monitoring reasonably required within the business will be high.
In organising the business for which they are responsible, the approved person performing a significant influence function should bear this in mind. The FSA will look to the approved person to take reasonable steps to ensure that systems are in place that result in issues addressed at the appropriate level.
As a general overview, the FSA expects an approved person performing a Sif to take reasonable steps both to ensure the firm’s complies with the relevant requirements and standards of the regulatory system and to ensure that all staff are aware of the need for compliance.
Illustrating and documenting these responsibilities will continue to be supervised by the regulator and this is an area that intermediary firms can ill-afford to ignore.