latest Content

Staying on the right side of the Regulator

Adviser firms need to understand the new regulatory requirements and how they will affect their business, if they are not to fall foul of the regulator, says Rebecca Prestage, head of policy, The Consulting Consortium

Economic downturn, consumer mistrust, RDR, mis-selling scandals and firm consolidation would be enough for any industry to overcome. Couple that with a new regulator and on-going developments from the EU, and the financial advice profession has certainly had its work cut out over the last twelve months.

However, with the landscape ahead looking 
more settled and stable, we take a look at the new regulatory environment and what firms are doing to ensure that they stay ahead of the game. As with any change, firms need to understand and embrace the new requirements as well as recognise how any changes will affect them and their business going forward. High on any firm’s agenda will be staying on the right side of the regulator and not falling foul of these changes.

The FCA’s statutory objectives (consumer protection, market integrity, and competition) are providing focus and structure to the supervisory model. It is a forward-looking regulator and, unlike its predecessor, is using judgment-based supervision with a view to preventing consumer detriment before it occurs.

The FCA’s new model is built on three pillars, consisting of:
1. Firm Systematic Framework (FSF);
2. Event Driven Work; and
3. Issues and Products.

And it is through the FSF that firms will experience how the FCA will assess their firm. It has replaced the FSA’s ARROW visits and it is how the FCA will look at whether a firm is being run in a way that results in the fair treatment of customers, and minimises risks to market integrity.

The FCA is very interested in a firm’s business model and culture, and wants to see that firms are placing the consumer at the heart of how they run their business. Firms must put customers first and treat them fairly and the FCA expects to see a culture of integrity and ethics, emanating from the board down. They will look to hold individuals accountable for any regulatory breaches and
will publish details of enforcement or warnings; both to name and shame, but largely to act as a deterrent to others.

With consumer outcomes of fundamental importance to the FCA, the degree of regulatory intrusion that a firm experiences will depend
on the category of firm that is being supervised and the FCA is deploying its supervisory teams accordingly.

Within the FSF is the Business Model and Strategy Analysis (BMSA). The BMSA is used to identify the conduct risks that may be inherent in the business model of the firm. The firms that are succeeding, in terms of the regulator, are the firms that are able to articulate and demonstrate to the FCA that they have a clear and sustainable business strategy and that their business model works with the end consumer in mind.

It is with the FCA’s Issues and Products work that we are seeing the FCA undertaking thematic work. Thematic reviews are used to assess a current or emerging risk relating to an issue
or product across a number of firms within a sector or market. They can be focused on both discovering what is going on and on how the FCA suggests the issue is tackled.

Thematic reviews allow the FCA to gain an insight into the activities of firms and gather evidence of market practice. We have already seen a series of thematic reviews launched, such as: how firms are implementing the RDR; the automatic renewal of fixed-term bonds; and a review into the Wealth Management and Private Banking industry, but it is also interesting to see that General Insurance products are also featuring highly on the FCA’s watch list with reviews into PPI, Mobile Phone Insurance and Motor Legal Expenses Insurance.

Falling foul of regulation
Following on from thematic work or reviews 
into certain areas within financial services, the regulator has issued industry guidance to share best practice with examples 
of both good and poor practice to press home 
the issues. We have seen, time and time again, that firms are not incorporating these examples of good practice, nor are they heeding warnings from the regulator. Many issues relate to poor systems and controls, but some relate to poor governance and culture. We have seen hefty fines imposed in cases where, although there has been no consumer detriment, firms have been unable to demonstrate that their systems and controls are adequate enough to identify risk, should it arise. Whilst the FCA recognises that there will
 be risks in any business, the firms that are best placed to identify and mitigate these risks are the ones that are faring well.

What do firms need to do?
The importance of business model and 
culture cannot be emphasised enough. Firms that understand their business strategy, 
their products, their target market and their processes are the firms that are able to better identify risks. A sustainable business, with good consumer outcomes at its heart, along with good governance, systems and controls, will be a successful business.

Key areas to look at, to ensure a successful business are:

• Governance
The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver long-term success. Firms must be able to demonstrate how they provide oversight of their business and controls, as well as defining how their controls are used. A clear definition of roles and responsibilities is imperative and forms the bedrock of a well-run business.

• Culture
Firms must have a clear and transparent policy that demonstrates what is acceptable and outlines a firm’s ethics and values. There must be clarity of accountability and transparency when it comes to decision making. How employees can escalate issues, should they arise, is an important factor in a business and the FCA is keen to
ensure that whistleblowing is a viable option should it be deemed necessary. A remuneration and incentives policy that has oversight by the compliance and risk management functions is a pre requisite. Firms need to be in a position to evaluate whether their incentive schemes are driving positive consumer outcomes.

• Controls
Advice and complaints processes must be designed with good consumer outcomes in mind and in adherence with TCF outcomes. There should be adequate and appropriate monitoring and oversight of directors, advisers, staff and third parties to ensure policies and procedures are being followed. Analysis of management information about products, advisers, financial issues & compliance issues should be a regular function of management.

Processes and procedures, controls, FCA reporting and client advice should be regularly checked for quality.

• Due diligence
Advisers should have a clear process and structure to researching products and they should make sure that this is clearly evidenced, recorded and kept up to date. Advisers should be familiar with investments minimums and withdrawal limits, as well as risk bands and definitions – platform only vs direct etc. Advisers should also be aware of how funds are managed – passive/ active, asset classes, rebalancing frequencies and performance history. Due consideration should also be given to platforms and tax wrappers,
as well as product charges and costs. Plus, determining whether or not a product is suitable, the product provider – brand/reputation financial strength and their servicing/administration levels – should also be a factor.

What the future looks like
We can expect more thematic reviews into areas where the regulator is either concerned about a particular product or practice, or where it wants to gather more information in a certain area. The FCA is demonstrating that it will use its new powers and will take a proactive approach to securing the confidence of the market and ensure good consumer outcomes.

As with most things in life, we do not expect FCA supervision to remain static and firms will need to continually review and appraise their business, compliance and governance, to ensure that they remain on the right track.

For more information on The Consulting Consortium go to:


More Articles Like This