The financial services industry has criticised the Financial Services Authority's "interrogatory and confrontational" interview manner during its Arrow visits, according to a survey by law firm Beachcroft Wansboroughs.
The survey, which questioned 136 firms across the industry about the effectiveness of the FSA’s Risk Assessment Framework - known as Arrow - found more than half of firms are highly critical of the FSA’s conduct and the impact of the visit.
In particular, firms say they are unable to take a proactive approach to managing a visit while some feel interviews are an "interrogatory and confrontational process".
More than two thirds (69%) of firms also say they are frustrated by the FSA’s failure to provide guidance on how they could lower their risk assessment rating following that visit.
A further 41% of firms are frustrated guidance is not given on prioritising the actions required of companies to improve their performance and service to customers, particularly as the findings from a visit:
- will dictate the level of regulatory scrutiny firms will receive in the future;
- can affect capital requirements, and
- may even result in enforcement action being taken.
Many respondents say their perception is the FSA believes the larger the firm, the greater the risk of failure, regardless of the quality of management.
But the survey also reveals FSA Arrow visits meet firms’ expectations from a process point of view. In particular, the FSA scores highly in the following areas:
- 85% of firms state the notice period they receive from the FSA about an impending visit is sufficient;
- 80% of firms confirm the FSA provides them with a preliminary briefing at the end of the visit;
- 77% of firms receive their Risk Mitigation Programme (RMP) within three months, and 67% of firms consider the issues raised in the RMP to be accurate; while
- 75% of firms state the FSA appears to have relevant experience of the firm’s market sector.
Nigel Frudd, head of financial services at Beachcroft Wansboroughs, says: “Although the survey shows that the FSA is meeting the expectations of firms from a process point of view, the frustration and hostility felt by many firms towards the FSA is a cause for concern.
“The FSA needs to address these issues if it is to be respected by those it regulates and be fully effective in achieving its stated aims.”
While he thinks some of the tensions between the industry and the FSA are to be expected, Frudd believes additional tensions arise from the framework of 'principles-based' regulation, which works best if all parties work in partnership towards shared goals.
He continues: “One downside with the partnership approach is that it would remove a degree of certainty for firms and for the FSA and this could lead to further issues. In a regulatory framework where a breach of principles can lead to criminal sanction, certainty may be more important.”
Robin Gordon-Walker, press officer at the FSA, says: "We always welcome feedback on the FSA and in particular Arrow, which is such a core process for us and our firms. We have already embarked on a significant process of change and development of Arrow designed to address the feedback from this survey as well as other feedback we have received."
He says the Arrow process needs to be clear in the evidence the FSA takes and its assessment of the risks firms pose, and that this "focused" approach may at times come across as challenging.
He adds: "We believe a significant part of this feeling is that the Arrow process can lack transparency to firms and we are making significant efforts to improve transparency as part of the changes we are making to the Arrow process. This involves better communication with firms of our assessment of them as well as providing more context to firms of where they stand in relation to a peer-group. We are also providing training on what a firm should do to prepare for an Arrow visit."
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7968 4554 or email [email protected].IFAonline
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