Managing director Nick Kelly says the FSA is currently conducting a supervision review involving a small number of directly authorised firms to identify if their systems and controls meet with regulatory requirements, but he expects this initiative to expand and follow the same route as the FSA’s TCF roadshows that stretched over several years.
Nick Kelly commented: “Due to its more intrusive supervisory approach we are seeing the FSA placing a greater emphasis on the capability of individuals holding controlling functions within adviser firms and making them more accountable for their actions.
“As part of its credible deterrence approach the FSA is also levying higher fines, which in 2010 almost trebled to £89 million, compared to those in 2009. The FSA is sending out a clear message and firms need to ensure they have robust controls in place to protect themselves.”
The most common compliance failures relate to issues around the suitability of advice, mortgage fraud due to fraudulent applications and failure to handle customer complaints properly.
As a result of failings that have been identified by the FSA, the regulator is now expanding its scope when considering who is accountable. Nick Kelly continued: “We are seeing more cases where the FSA is taking action against the firm and those individuals within the director (CF1) and partner (CF4) functions, in addition to focussing on the individuals performing the compliance and oversight function (CF10) within those firms. These individuals are being held personally accountable for any failure of the firm’s systems and controls within their remit.”
In view of this, Bankhall is recommending that firms take appropriate measures to protect themselves. 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 the support services provider believes there are some scenarios that can help to illustrate the issue.
As a guide, Bankhall recommends that firms have controls in place that help them to demonstrate:
• How and by whom the firm is being managed and controlled;
• What management information is produced and how this is used to identify and address current and potential risks to the firm and the customer base;
• The firm’s financial strength, including analysis of regulatory reporting and ability to provide services; and
• The firm’s plans and progress with regard to RDR.
Bankhall is also highlighting recruitment processes as another area where advisers need to tread carefully. This is particularly relevant for larger firms who need to ensure the right individual is recruited for any significant influence functions.
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.
Kelly concluded: “It is important to remember that financial services firms and directors work within both a regulatory and a legal framework.
“Regulatory requirements will often take precedence. For example some firms will go down the route of incorporating their business for tax reasons based on their accountant’s advice, and also in the expectation that this will limit liabilities in the event of insolvency. However, the FSA will not allow firms and individual directors to flout their responsibilities to clients and the industry.
“The FSA and FSCS are likely to pursue individuals who have personal assets that can be used to provide redress to clients following systemic failures identified within the business, even though that business may no longer be trading.”
