The FSA is taking a tougher stance when it comes to compliance-checking financial advice firms, to such an extent that the Association of IFAs (AIFA) has warned members the regulator has “raised the regulatory hatchet” over the past 18 months as it implements, and seeks to demonstrate, its increasingly “intrusive” style of rule.
The customer redress ruling at IFA firm, Park Row, earlier this year, reinforced the FSA’s stricter position as well as the importance of adhering to governance, risk management and compliance (GRC).
Park Row, the former Royal Liver-owned distribution business, was ordered to redress up to £7.8m to customers after the company reduced the number of cases it checked for compliance in 2008, from 35% of cases to 25%, despite multiple warnings from the FSA.
As operational risk management travels further up intermediaries’ agendas and compliance costs continue to rise, advisers are looking for ways to cut costs through automated systems and by improving administrative processes, particularly smaller firms that may not have the manpower to oversee effective compliance internally.
Stephen Young, chief operating officer at Sesame Bankhall, says: “It is difficult for small firms to have the knowledge and resources to run a robust risk management team. To minimise risk they need to either join a network, which will assume responsibility for compliance and risk management or outsource to a quality compliance outfit.”
Debate has flared about the effectiveness of networks’ compliance checking criteria, with rumours that some networks check as few as 10% of files, a contention Young dismisses: “Sesame checks about 35% of files. We do this based on a risk-profiling system. For instance, we check 100% of newly qualified advisers’ files and 100% of those areas considered particularly risk prone such as pension transfer cases, pension switching, income drawdown and advice to the elderly.
“We also do ‘themes’ on particular areas, for instance over a three-month period we might double the amount of surveillance done on a particular type of case, bond sales versus correctives, for example. As well as desk-based monitoring, we also have field-based teams. So in total we have about 150-160 people who manage the intervention process.”
Advisers are divided over automated systems versus integrated compliance checking processes. Martin Bamford, chartered financial planner at Informed Choice, says: “Desk-based monitoring is not something we’re in favour of because it’s done after the fact and often remotely, both of which increase the likelihood of oversights occurring.”
The firm embeds its compliance checking process into the work stream: “We view it as an ongoing process rather than a single event at one point in time. For example, for the past five years we’ve undertaken document writing prior to delivery. That way the client can get to grips with any issues before the deal’s confirmed and any questions or concerns can be addressed.
“A team-based approach also helps; collaboration on advice before it’s delivered is a very effective means of minimising risk. Having just one individual working on a file from inception to completion increases the risk of errors occurring.”
Informed Choice also avoids risky areas of advice and products: “Pension switching and structured investment products are two areas with potentially heightened compliance risks,” says Bamford. “The obvious expedient of having well qualified people and a remuneration scheme that rewards quality of advice rather than product sales remains one of the most effective ways of mitigating risk.”
The potential dangers of inadequate file checking procedures were highlighted earlier this month when the FSA imposed heavy fines on the partners at a Sheffield-based firm of IFAs and mortgage brokers, Pace Financial Management, for failures that ultimately led to the firm being used to facilitate financial crime.
Paul Armitage and Huw Evans were fined £17,500 each, while Brian Smith was left £14,000 in the black. The regulator found that inadequate supervision of mortgage advisers at the firm and a lack of effective file-checking procedures enabled a partner to carry out financial crime with a mortgage adviser working for Pace.
AIFA director general Chris Cummings says in light of this and other crackdowns, IFAs would be wise to assess their systems and controls procedures, particularly on case checking and recordkeeping, to ensure that what the FSA considered treating customers fairly (TCF) two years ago would still be the same today.
Although rigorous compliance checking is not cheap and some firms may resent it as yet another fruitless imposition, effective compliance procedures may motivate advisers to go the extra mile and ensure they have considered all the needs of their clients.
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