Most regular readers of Questions from hell are likely to be involved in the regulatory compliance of their own firm as part of their job responsibilities, and many may have thought more than once about the advantages of employing a compliance consultant and whether the benefits of using consultancy justify the costs. Last month, the Financial Services Authority (FSA) published the results of its own research on the subject of compliance consultancy, and the findings may prove useful to those currently weighing up its pros and cons.
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The FSA’s survey included 22 small firms currently using compliance consultancy and the results showed that, despite employing consultants, nearly half of the firms had significant weaknesses in respect of their regulatory compliance and a third were not actually acting on the recommendations from their consultants that would have improved their performance. At the same time as publishing these somewhat disturbing results, the FSA also published a factsheet and examples of good and bad practice on its website, which are designed to help small firms in their quest for effective compliance consultancy.
This literature carries four strong messages about using a consultancy. First and foremost, is the message that every firm is wholly responsible for its own compliance. Using a consultant does not guarantee compliance, and no firm can contract out of its regulatory obligations. Even in the unfortunate circumstances of a firm acting in good faith on erroneous consultancy advice, the firm is still responsible. The next topic is choosing the right service. What do you need the consultancy to supply? Can you be selective or do you have to take a comprehensive package? Is there a service level agreement? Does the service include technical support, training, file audits, and risk assessments?
Thirdly, firms need to assess and monitor their consultants. Are they providing what they said they would? Do you have confidence in the level of skill and experience demonstrated by your consultant? Are they keeping you up-to-date with regulatory and product changes? Are they matching up to the references you obtained?
Finally, once having been given consultancy advice and assessed its merits, firms should be acting on it. An example is given of a firm that received consultancy advice abut its failures on various fronts, including: poor recording of customer information; inability to demonstrate the suitability of advice; no monitoring of advice; and no implementation of its Training & Competence regime. 18 months later and FSA visit identified the same issues – none of which had been acted upon, and the result was a fine and public censure for the firm.
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This information on choosing and working effectively with compliance consultancy can be found in the small firms section of the FSA’s website.
Checking up on us?
Q1: I was talking to a lender’s business development manager (BDM) and he mentioned that he believed that providers would soon be checking up on broker advice. I thought this idea had disappeared long ago since the FSA suggested it prior to ‘Mortgage Day?’
Bill answers: Your BDM was probably referring to the product provider’s responsibilities as set out in the FSA’s paper DP06/4. Section three sets out the responsibilities of both providers and distributors, particularly in the context of ‘Treating Customers Fairly’ (TCF). Providers’ responsibilities are that they must deliver products that are soundly designed with clear, understandable information for both clients and distributors. It will probably come as no surprise that the distributor – especially where an advised sale is involved – must ensure the client has all the appropriate information needed to conclude a sale. The distributor or seller must challenge the provider if the product detail or the anticipated market is unclear. The distributor must also undertake to provide an effective post-sale service. Section 3.1 states that the product provider must monitor the end result. This could be interpreted as checking the distributor’s quality of advice.
The protection message
Q2: We are a small firm with 10 advisers concentrating primarily on mortgages with general insurance as a secondary activity. Within the confines of the ICOB rules we try to identify clients’ protection needs and suggest what action they should take in every sale. This is often hard as the client is really only interested in getting their mortgage. Should we be trying in every case to identify their protection needs?
Bill answers: You should be trying in every case in my opinion. Protection insurance has to be sold – it is rarely asked for, despite the very obvious need quite often. Using a demands and needs statement approach can be helpful – not only does it give a structure but it also enables you to record the client’s reaction to the various types of protection available. I believe advisers would be doing their clients a disservice if they didn’t point out their protection needs and would be opening themselves up to a challenge later that they failed to point out the risks of no cover. The words ‘best practice’ and TCF come to mind.
Starting the review
Q3: Within the FSA’s list of work for 2007 and 2008 was a further review of the non-conforming sector. Do you know when this will start?
Bill answers: Very soon I understand – towards the end of May or early June 2007. In fact, it may have already started.
