We have begun to glimpse the iron fist concealed within the velvet glove that is the cuddly outward manifestation of the Financial Services Authority (FSA). No more weasel words about ‘risk-based assessment’ and ‘light-touch regulation’. Now the buzzwords emanating from Canary Wharf are ‘obligations’, ‘responsibilities’ and ‘enforcement’.
It is the sound of the first smashing plate as the honeymoon period ends following the shotgun marriage between regulator and the financial services’ intermediary.
The cause of the first major row was the discovery by one party, the FSA, that the other had been playing foot loose and fancy free with the rules in the pre-nuptial agreement – namely that key facts documents detailing fees or commission and the status of the firm – were being hidden from their mutual friends, the consumer.
What really hurt the FSA was that ‘these firms are not new to regulation and senior management should be well aware of their responsibilities for compliance with our rules’. You can really feel the pain of betrayal. And there are few things more dangerous to business than a wounded regulator. It has promised that it will be conducting a further round of mystery shopping later in the year to make sure that firms have improved their procedures.
However, we should not be surprised by its actions. Since its inception, the FSA has shown it is ready to impose heavy penalties on firms that fail to comply. What’s more, it is active in ‘naming and shaming’ these firms; publishing details on its website and sending out press releases to relevant publications. The resulting publicity can seriously damage firms’ reputations and drive away clients. In some cases, companies have been banned from conducting business.
Taking a closer look
So what should brokers be doing to make sure they are conducting business in a compliant manner?
To meet compliance needs effectively, firms need to regularly take a close look at their business – especially the way they process, issue and store, and access relevant documents. The more streamlined a company’s business processes, and the better it manages documents, the more effectively and efficiently the business will run. Setting up an IT system that will provide a single view of all the key information held by the business, for example, makes sound business sense as well as supporting compliance.
However, the success of any important organisational activity, such as compliance, is almost entirely dependent on how seriously the issue is taken by senior management. Senior managers need to be seen to be wholeheartedly behind the project; involved at all stages and oversee the changes to the way the firm conducts business through the implementation of regulatory changes as, and when, they occur. This can be time-consuming and needs to be approached properly, perhaps by dedicating a senior member of staff to the task.
Staff awareness, education and training is another key area, as the compliance of a firm requires the co-operation of staff at all levels. Companies need to make sure that their staff are fully trained, that they understand the new processes, and that they conform to the new regulations. Perhaps more importantly, they need to fully understand the risks of non-compliance – both for themselves and their financial services firm.
Embracing the concept
Many organisations publish their compliance processes, and expect staff to follow them. But this overlooks the reality that some staff will look for shortcuts to make their job easier. From the FSA’s point of view, publishing compliance processes is not enough. Companies must demonstrate that staff members have embraced the concept and are actually using these processes. There is frequently a gap between what senior managers think is happening within the business and what is actually happening ‘on the ground’.
Research carried out in 2003 found that independent financial advisers (IFAs) spent almost as much time on compliance as they spent face-to-face with clients.
The researchers interviewed 400 small, medium and large IFA firms and found that 45 per cent spent between six and 10 hours a week on client-facing billable work, while 44 per cent spent the same amount of time on compliance. The IFAs interviewed believed that the main factors that would help them spend more time with clients would be a reduction in regulatory requirement and more effective IT possible pre-sale check to validate appropriateness of advice and recommendations.
Instead of trying to go it alone, some intermediaries may decide that they would be better off by outsourcing the compliance responsibility to someone else. This removes the burden of record-keeping, staff training and keeping up to speed with every instruction from the FSA in Canary Wharf. It also lets the intermediary get on with what they do best – offering the best possible service and advice to his or her clients.
Outsourcing
There are several routes open to intermediaries who decide that outsourcing might be the best model for them. Aligning themselves with a network that has key relationships in other sectors already in place is one way to go. Becoming an appointed representative (AR) has the advantages of devolving compliance responsibility to the network who acts as your principal and is therefore subject to paying the FSA fees. It shold also have in place comprehensive procedures and documentation as well as offering compliance training and support. If you do not want to sacrifice your independence by throwing your lot in with a network, you could buy-in compliance services from a third party. But this can be expensive and still leaves you with the burden of responsibility.
If you sell or advise on general insurance (GI), consider introducing GI enquires through a facilitator. However, you should make sure that they can offer a whole-of-market choice to your clients and have experienced insurance personnel and are not simply a call centre.
Introducing clients has other plus factors: regulatory requirements fall on the facilitator and not you; you don’t have to maintain a client premium acount and if you are not selling or advising you won’t have any PI claims. Best of all, you still receive a good rate of commission.
High-level principles
Late last year the FSA launched a plan to reduce the burden and cost of compliance on companies. In it, the regulator proposed more than 30 changes to regulations, including simpler and briefer rules, removing barriers to financial advice, lifting audit requirements for smaller firms and cutting bureaucracy.
The government watchdog said it is looking to ‘move the balance of financial services regulation towards high-level principles rather than detailed rules and guidance’.
The FSA has also said that firms offering advice on mortgages can now benefit from a temporary concession already allowed for investment advice. The effect of this is that money that advisers receive by way of commission relating to fee-based advice will fall outside the scope of the FSA’s client money rules. This arrangement mirrors one already in force for financial advisers on their investment business.
Mike Lord, head of investments – small firms division at the FSA, said: “This is in line with our aim of keeping the effect of our regulation on firms, particularly small firms, to the minimum that is necessary to meet our consumer protection remit.”
The powerful fist withdraws once again into the velvet glove. But, make no mistake, compliance is an issue that is not going to go away. Firms will continue to struggle to respond to the challenges posed by the regulations and this will begin to hit home as the bills from the FSA soon begin to land on firms’ doormats. The temptation is to ignore them, but non-compliance is a very risky business. The FSA is very active in imposing penalties on firms who fail to comply. While many firms see compliance as a necessary evil, others perceive it as a business opportunity. Compliance can be seen as an opportunity for firms to improve their understanding of their clients’ needs and streamline their business processes. By using a combination of technology and outsourcing, and keeping abreast of regulatory developments, the intermediary can avoid the FSA’s radar.
Ted York is managing director at Berkeley Alexander Insurance Services
