There is currently a bleak picture being painted for small firms operating in the intermediary sector as the issue of fees, regulatory requirements and the financial climate as a whole continue to top their agenda especially for those directly authorised firms.
It is pretty much a given that we will continue to see consolidation in the intermediary marketplace and with reports suggesting that up to 30 per cent will leave the adviser community it is not difficult to see that more needs to be done to help these smaller firms feeling the weight of the regulator and market conditions.
Diversify
This exiting of the market is mainly down to one simple thing – a fall in regular income. In the ‘good old days’ many firms simply concentrated on writing mortgage business but are now being forced to return to, or begin looking at, other areas of financial services such as investment, equity release or protection business in order to survive. This is a valid course of action as we all have to diversify to varying degrees in a struggling market but it is important that firms possess up-to-date knowledge and skills to provide high-quality advice, and ensure that appropriate supervision and monitoring arrangements are firmly in place.
The director of the FSA's small firms division recently warned firms not to move into new areas of advice unless they can ensure customers are treated fairly. This comment may well suggest that a thematic review involving firms writing business in new areas may be around the corner, so watch this space.
FSA
As a regulatory body the FSA has had a variety of criticism laid at its door recently from all angles including the national press. However, despite maybe appearing preoccupied with concerning itself over the financial stability of various banking institutions, it has not taken its eye off the ball and remains focused on it work on issues affecting intermediary firms.
Looking to the future and the financial challenges offered by 2009, the beginning of the year also heralded the moving forward of the FSA’s TCF assessments into its core supervisory work from its original plan.
The FSA has continually stated that TCF will be embedded within its core supervisory work and that individual firm’s delivery of TCF outcomes will be assessed in the impending ARROW visits. These assessments will involve a review of TCF outcomes with reference to a firms own management information; direct testing of the consumer experience and examination of any other relevant, up-to-date evidence. The assessments will also use the TCF Culture Framework to identify where there are risks that might prevent good performance from being sustained or to identify or explain poor performance where it exists. The FSA has also stated that where it finds failings it will continue to use its full range of regulatory powers to take tough action.
However, this approach will only concern larger intermediary firms - ARROW visits will not be relevant to small firms who are not subject to this supervisory approach - but there is no letting up on the FSA’s attitude to assessing smaller firms which will continue in earnest. The final industry deadline may have passed but TCF has not gone away and the small firm assessment programme is only a third of the way through. It continues throughout 2009 and 2010.
The FSA takes a different approach for small firms by issuing TCF questionnaires and interviewing their principles/directors/partners. The interviews are conducted either face-to-face or over the phone and the FSA’s questions are centered around Outcome 1, in particular the FSA’s leadership framework for small firms. Under this enhanced strategy, its three-year regional assessment programme will carry on this approach region by region and is currently focusing on the South West of England. The FSA has not published details of the regions to be targeted in the rest of 2010 but, anecdotally, the word on the grapevine is that it may be shifting its attentions to the South East next.
Cut costs
Financial worries mean that most firms are having to cut costs to varying degrees but when doing so one area that can suffer is supervision. Trimming costs should not come at the expense of having someone in a position to monitor the quality of the advice being given. It may be more cost effective to outsource this supervision by seeking expert help in this area but either way it is of paramount importance not to ignore this area of the business.
If firms cannot monitor the quality of specialist advice effectively in house and are not prepared to pay for outside help then the next step would have to be to refer the business to another adviser firm, otherwise it would involve risking the wrath of the FSA. Hector Sants, CEO at the FSA said recently: “There is a view that people are not frightened of the FSA. I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA.” As Dr David Banner also said before transforming from a mild mannered scientist into a big, green raging monster; “You won’t like me when I’m angry.” The same applies to the regulator, well in the form of the levying of fines rather than throwing cars at least!
Expectations
With this in mind firms, small and large, need to be fully aware of the FSA’s expectation.
In terms of smaller firms’ preparation for visits and longer running strategies, there are a number of tools and material available to help firms to deliver these requirements. Specialist compliance support companies can help provide experience and knowledge to firms requiring additional support on what steps they should be taking and in providing specific guidelines needed to ensure a strong culture of TCF is embedded within their processes. It is vital that TCF should not be viewed with a tick box mentality simply to keep the FSA at bay, when integrated properly and extensively it can help provide the backbone of any good business.
Small firms should view TCF as a central part of the culture of their firm. Many small firms fail to demonstrate strong TCF values as they have responded to the deadlines by collating management information (MI) which they believe the FSA is looking for. However, this MI is often irrelevant to the nature of their business or the frequency in which it is reviewed is inadequate to spot trends – being either too frequent or not reviewed often enough. Small firms should therefore address TCF from a starting point of what they need to know to ensure that they are treating their customers fairly and how often they need to test this.
Systems and controls
In accordance with FSA rules all firms must satisfy themselves that their systems and controls are adequate and indeed appropriate to their business activities. They need to collate in one place documentation and evidence which demonstrates the maintenance of their systems and controls. This information can be referred to during an FSA visit or will make it easier to comply with the FSA’s pre-visit documentation request
The overall aim is to provide a high level overview of how robust the firm’s systems and controls are, therefore evidencing that the firm’s management are meeting their regulatory obligations in managing the firms affairs prudently, reviewing the effectiveness of internal systems and controls and taking appropriate action when needed.
As with most things in life preparation is the key and this is certainly the case when the regulator comes knocking. Forewarned is forearmed and there is a raft of information and support out there for intermediary firms, Smaller firms must remember that they are not alone and compliance support services can help play an integral role in their business and keep the FSA at bay.
