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Simon Collins: Ethical case study

Scenario: You are the compliance officer, FSA approved person and minority shareholder in a small investment management firm. Recent times have proved successful, with the firm going from strength to strength. Much of this success has been attributed to star adviser Joe Bloggs. Joe has built up a large bank of extremely valuable high-net-worth clients who between them hold over 60 per cent of the firm’s assets under management. The firm’s directors are extremely protective of Joe and have always insisted he be supported and accommodated as appropriate.

The firm’s success has not gone unnoticed and talks are at an advanced stage with a major international party which is interested in a buyout. This will provide all shareholders of the firm (including you) with a very lucrative return for their shares.

In the course of routine personnel file checks, you come across Joe Bloggs’ personnel file and you are surprised to learn that no evidence of his degree or qualifications are present. This is particularly concerning when considering that the firm’s website states Joe’s degree qualifications. Also of concern is Joe attaining proper competence as per RDR requirements. You understood Joe was left with some relatively straightforward gap-filling to perform. However, this has now been thrown into doubt.

When you ask Joe to provide you with the required evidence, he responds: “I’m far too busy to mess around with compliance stuff, I’ve got money to make.”


  1. How do you deal with the firm’s ‘star player’?

  2. Do you approach the directors to inform them of this potential problem or, with the impending buyout, do you leave it until afterwards in the fear of upsetting everybody? After all, it may well be that there is no problem.

  3. What behaviour should be expected of Joe himself?


When applying to the FSA for approval for Joe to carry out the controlled function CF30, it was incumbent upon the firm to establish that he met the assessment criteria for fitness and propriety of an approved person. The firm would have given confirmation to the FSA that Joe met the necessary competence and capability requirements to carry out the CF30 function and that it considered that he met the test of honesty, integrity and reputation. The missing qualification evidence (until presented) brings these two “tests” into question.

The FSA expects firms to undertake appropriate due diligence into those individuals on whose behalf they are applying for approved persons status before any application is submitted for approval. Firms’ enquiries should include, inter alia, checks to verify relevant qualifications and previous employment.

The firm could be deemed to have breached a number of the FSA’s principles for businesses, for example:

  • Principle (1) – integrity – a firm must conduct its business with integrity

  •  Principle (2) – skill, care and diligence – a firm must conduct its business with due skill, care

    and diligence.

  • Principle (3) – management and control – a firm must take reasonable care to organise and

    control its affairs responsibly and effectively, with adequate risk-management systems.

    Although the onus will be on the FSA to show that the firm has been at fault, if proven, the firm could be liable to disciplinary sanctions.

    The seriousness of the situation must be explained to Joe and he must be provided with a deadline for providing the missing information. Failure to provide the qualification evidence could mean that Joe is not deemed competent to carry out his role. If Joe’s competence cannot be evidenced and he is deemed not competent, then this will need to be reported to the FSA at the earliest opportunity, as required by SUP 10.13.16R. Such an assessment may mean that Joe has to stop undertaking advisory activities if he is unable to prove that he has at least the regulatory element of an appropriate qualification and, if he has such a qualification, it will mean enhanced T&C provisions are required.

    Q2 Answer:

    The compliance officer will certainly be a senior manager within the firm and as such has been appointed to report to the governing body in respect of oversight of the firm’s compliance.

    In any event, a review of the recruitment process will need to be carried out to ensure that the controls are sufficiently robust to ensure that all individuals are suitable for the role and that all required evidence has been acquired in respect of an approved persons to carry out a controlled function.

    Pre-RDR non-compliance

    In the event that Joe cannot furnish the necessary documentation and is deemed not competent under pre-RDR requirements, the firm may have to review the quality of Joe’s investment advice over and above the usual business monitoring levels to ensure that appropriate standards have been achieved and to ensure it was suitable. The firm will need to report the situation and its proposed activity to remedy the situation to FSA as set out in principle 11 of the FSA’s principles for businesses.

    In this scenario, then, it is likely that the outcome may impact the buyout and therefore the directors must be made aware.

    Post-RDR non-compliance

    In the event that Joe will now not have the required qualifications to enable him to take advantage of gap-fill under the RDR, suitable exams will need to be taken and passed prior to December 31, 2012 to ensure that Joe is competent to continue in his current role with effect from January 1, 2013. Until he has achieved a pass in an appropriate qualification, he cannot be considered to be competent and will be subject to enhanced supervisory activities befitting such status.

Q3 Answer:

As an approved person in a customer function role, Joe must comply with the first four statements of FSA’s principle for approved persons. The FSA’s code of practice for approved persons describes conduct which would not, in the FSA’s opinion, comply with the statements of principle for Approved Persons.

In respect of Statement of Principle 1, which requires all Approved Persons to act with integrity, Joe’s conduct would not comply as, until the issue is resolved, he is at risk of being deemed to deliberately mislead the firm or the FSA by either act or omission as follows:

Providing false or inaccurate documentation or information, including details of qualifications


In your role as compliance officer of the firm, you are ethically and duty bound to investigate this matter as soon as possible. Ethics is about both thinking and doing the right thing:

  • Are you acting in an open way – is everybody impacted by your action or decision made aware of it?

  • Are you acting honestly – does it comply with applicable law or regulation?

  • Is there transparency – it is clear to all parties involved what is happening?

  • Are you acting fairly – is the transaction or decision fair to everyone involved in it or affected by it?

    While the outcome may show that there is actually no problem with Joe’s purported qualifications, if the outcome is not so favourable, then it may have an impact on the buyout and the firm’s reputation.

    Failing to investigate the matter for personal benefit and subsequently learning of problems with Joe, raises questions against your own integrity and failure to observe your duty of care. This would be further exacerbated by the reputational risks the firm and its directors would face and the impact to shareholders.

    In this particular scenario, acting unethically would present both regulatory risks to the firm as well as reputational risks and possible loss of share value to shareholders.

    Simon Collins is managing director of Resources Compliance


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