Making sense of FSA Compliance

FOS Limit increased and changes to Complaints Handling arrangements

noreply@blogger.com (Ian Cass) — Fri, 27 May 2011 12:23:00 +0000

The FSA are inviting comments on the "Final Rules" by 31st August 2011 on CP11/10 : Consumer Complaints: The Ombudsman Award Limit and changes to the complaint handling rules.

From 1st September 2011 Firms will be required to identify a senior individual within the Firm responsible for complaints handling. Firms are also expected to take into consideration the findings of FOS and undertake root cause analysis. Further guidance is to be published by the FSA.

FOS have published some useful guidance notes for Firms and these may be found at

http://www.financial-ombudsman.org.uk/faq/index.htm

From 1st January 2012 the maximum FOS award limit will increase from £100,000 to £150,000. This higher figure will then apply to any eligible complaint case referred to FOS after this date regardless of when the cause for the complaint took place.

From 1st July 2012 the two stage approach to dealing with complaints will be abolished. The FSA expects Firms to deal with complaints more promptly and accepts that there may be a 5 - 30% increase in the numbers of complainants that take the matter to FOS. Firms will still be expected to issue a "final response" letter within 8 weeks.

The FSA will also be issuing a joint communication with the Claims Management Regulator, FOS and FSCS concerning Claims Management Companies aka Ambulance Chasers. The communication will make it clear to Consumers that Claims Management Companies are permitted to charge a fee for handling the referral of a complaint to the Ombudsman service and the issues a consumer should consider when choosing to use a CMC.

The Paper also makes references to changes to the definition of "eligible complainant" and in particular the scenario where an individual has been subject to identity theft and is being pursued by debt recovery teams on behalf of Regulated businesses.

Client Money - more changes expected

noreply@blogger.com (Ian Cass) — Sat, 12 Mar 2011 11:07:00 +0000

The FSA were planning on introducing changes to client money controls and requiring Firms to appoint a CF10a (Controlled Function responsible for Client Money). These planned changes are pressing ahead for Large and Medium Size Firms. Such Firms will also be required to report on a monthly basis & will already have been contacted directly by the FSA.

All other Firms that are authorised to hold / control client money will be contacted at the beginning of July - and will be required to provide details to the FSA of the highest balance held on the Client Money Account during the period Jan - June 2011.

Ultimately, the FSA wants all other Firms to provide the data on a half yearly basis - those not currently on the radar but who held significant client funds during the period will be added to the Large / Medium Firms list.

Further details may be found at http://www.fsa.gov.uk/pubs/cp/cp11_04.pdf - Chapter 3. Annex B gives details of the additional data to be collected. This requirement only applies to Monies held under the CASS requirements and as a result those Firms which hold client monies and also have risk transfer arrangements in place will need to be able to clearly segregate the two.

This is still at the consultative stage and we can expect final confirmation from the FSA in April /. May.

Retail Distribution Review Timetable

noreply@blogger.com (Ian Cass) — Mon, 14 Feb 2011 10:57:00 +0000

Further Consultation papers are expected from the Financial Services Authority concerning :

Retail Distribution Review (RDR) - changes to the GABRIEL Reporting requirements inc Complaints; Product Disclosure charges following the introduction of Customer Agreed Remuneration; Capital Requirements and how to apply a consistent approach to expenditure based requirements (EBR).

By the end of 2011 - all IFA's (the FSA prefer to call them Personal Investment Firms or PIF's) must have arrangements in place to monitor and evidence that they hold the greater of £15,000 or one months EBR.

By the end of 2012 - Learning statements need to be in place and ALL advisers should have acquired the necessary level four qualifications plus gap filling where required. All advisers need to be operating on a Customer Agreed remuneration / Consultancy Charging model . All advisers should describe their services as restricted or independent.

By the end of 2013 - all PIF's will need to hold a minimum of 3 months EBR or £20,000.

CP10 -28 - More on Mortgages

noreply@blogger.com (Ian Cass) — Mon, 22 Nov 2010 18:27:00 +0000

Another day, another 99 pages from the FSA and comments invited by 25th Feb 2011

http://www.fsa.gov.uk/pubs/cp/cp10_28.pdf

The proposals cover regulated mortgage transactions - but there are hints that further papers are likely to cover business loans, BTL, 2nd Charge etc.

Key points for comment include:

Replacing the requirement for an IDD with a requirement to disclose information on remuneration and scope of service at an early stage in the process - either at the first meeting or within 5 days in the case of telephony based contact. But it is still ok to use a Combined IDD.

Replace "Whole of Market" with "Independent" and if you are not "Independent" then you must be "Restricted" - simple.

"Independent" will no longer be required to give the client a fee option.

"Independent" will need to inform the client if "Direct only" products are not considered.

"Restricted" will need to advise if one provider or multiple together with details of any further restrictions.

All Mortgage arrangers / advisers will have 30 months to achieve level 3 qualification status. There was a hint that level 4 may be the target at some point in the future - time to complete those exams. All arrangers and advisers to become CF31's.

Non advised sales - the products need to be "appropriate" and affordable; but income verification will be the responsibility of the lender and not the intermediary.

Firms can forget about sophisticated investors or streamlined service option - the affordability tests will apply to all transactions.

Where a Firm has given advice and the client rejects that advice then they CANNOT arrange an insistent Customer mortgage - not sure quite how that is going to be enforced.

Firms that use the internet to generate filtered enquiries / sales will need to ensure that the staff within the Firm writing the suitability questions are level 3 qualified.

The FSA have concerns that Intermediaries are not taking into account when clients have a mortgage term that extends into Retirement - can do better.

Adding Arrangement Fees to the loan has not been banned - but if they are then 2 KFI's will need to be provided to the client one with fee added and one without. The client will need to give their express consent to
add the fee to the loan.

Firms will need to improve their record keeping arrangements - prove that you are complying with the new regime

Firms will need to make an Oral disclosure to the client about fees and scope of service. If the transaction is via the internet then the client will be required to "pass through a gateway" to ensure that they have seen and are aware of the scope / fees issue. Hiding the details as a link is not permitted.

Suitability letters - still not compulsory (I think that they should be).

Money Laundering prevention - enhanced due diligance

noreply@blogger.com (Ian Cass) — Fri, 24 Sep 2010 08:52:00 +0000

Regulated Firms are required to have appropriate controls in place to counter the threat of Money Laundering and terrorist financing.
The FSA requires Regulated Investment Businesses to have systems and controls in place to counter any threats to Financial Crime and this includes enhanced due diligence. There are three scenarios where the Firm is required to undertake enhanced due diligence:

Non face to face transactions

Dealing with Politically Exposed Persons (PEPs)

In respect of a correspondent banking relationship

In a nutshell, the Firm is required to have verification procedures in place to determine if the transaction is involving a PEP - (not to be confused with Personal Equity Plans), or a remote transaction such as over the Internet or telephone based.
Such cases should be referred to senior management within the Firm:
For approval
to establish or maintain a business relationship with the customer;

To be satisfied that the source of funds from such customers is documented;

To be included in the enhanced ongoing monitoring of the business relationship.

This can be done on a risk-sensitive basis.

The JMLSG guidance notes were last updated in November 2007

Section 5.5 sets out the requirements for Enhanced Due Diligence (EDD):

EDD must be used for all situation which by its nature can present a higher risk of money laundering or terrorist financing. This may be done on a risk based approach.

The EDD supplements the existing verification and KYC requirements.

s 5.5.6 states - "When someone becomes a new customer, or applies for a new product or service, the firm may, depending on the nature of the product or service for which they are applying, request information as to the customer’s residential status, employment details, income, and other sources of income, in order to decide whether to accept the application."

Maintaining a list of customers that are subject to EDD together with notes of the ongoing monitoring is also necessary.

RIP Self Cert Mortgages?

noreply@blogger.com (Ian Cass) — Tue, 13 Jul 2010 09:56:00 +0000

The Financial Services Authority have published an interesting Consultative Paper on the future of "Responsible Lending". This is part of the FSA's enhanced consumer protection strategy - and smacks of bolting the stable door after the horse has bolted.

Comments are invited by 16th November 2010 on these proposed changes to Mortgage Regulation.

Some of the key proposals include:

Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer's ability to pay;
Requiring verification of borrowers' income in every case to prevent over inflation of income and to prevent mortgage fraud;
Extra protection for vulnerable customers with a credit-impaired history.
For Interest Only Mortgages - expect a further paper from the FSA but in essence requiring the borrower to have an appropriate repayment vehicle in place to repay the balance of the loan.

This will also impact on the Self-Employed and will require them to be able to evidence that they have adequate means to maintain and repay any loans.

Further information is available from the FSA website

What now for Mortgage Advisers and Arrangers?

noreply@blogger.com (Ian Cass) — Mon, 28 Jun 2010 11:11:00 +0000

The FSA paper on the Mortgage Market Review PS10/9 makes gripping reading and will result in a number of people leaving the Industry.

Gone are the days when a mortgage salesperson could "duck under the radar" and hide behind their Principals
licence when advising and/or arranging regulated mortgages.

The policy statement confirms that all advisers and arrangers AND their supervisors will have to become a Controlled Function (CF31). For many existing IFA's I will hear you say "So what?" we are already a CF30 - but you will need to apply for the additional CF - and the FSA have developed an on line notifications portal to cope with the anticipated 20,000 applications. This new system needs fine tuning and should be ready to accept applications for the new CF from 31 March 2011.

The FSA will, once fully implemented, have available for public display a full list of all CF31's in the Industry. The new rules should reduce the risk of unsuitable people operating within the Industry and to make those that do fully accountable for their actions.

Those thinking of moving to restricting their activities to unregulated mortgages are in for a shock. The plans to extend the scope of the "son of FSA" in a couple of years will result in BTL and second charge loans being subject to this regime too.

Interestingly, the FSA believe that this is the right tool for reducing Mortgage Fraud.

• CF31 will not cover the functions which take place after the application by the customer for a home finance transaction unless the person concerned is also involved in the upfront sales process.

• CF31 will not apply where no new monies are advanced . So, an individual will be exempt from requiring approval for CF31 if the home finance transaction they are dealing with does not involve new monies being advanced.

Trainees are permitted to become CF31's but the Firm will need to have a robust process in place to ensure that :-

The Individual is "Fit and Proper"
Taking relevant professional examinations
Receiving ongoing supervision and coaching
Records of the ongoing supervision and CPD are up to date

There will be no need for the Firm to notify the FSA once the Trainee has been signed off as competent - but the Firm must retain records.

Firms are expected to undertake "Fit and Proper" checks on all new staff (trainees and job movers) including undertaking CRB checks. Any adverse information must be disclosed to the FSA. The FSA expect that such CRB checks are current - not than 2 months old prior to the date of the application for CF31.

Firms will need to have in place robust systems that can demonstrate compliance with these new rules - in order to qualify for the transitional arrangements.

Recruitment - referencing including a current CRB check.
Professional qualifications - where relevant
Record of supervision / coaching
Approval arrangements - competency
Appointment of CF10 - Compliance Officer

Small Firms will be required to have in place arrangements to obtain CRB checks- details of umbrella organisations that may be able to help can be found at http://www.crb.homeoffice.gov.uk/

CRB checks take anything between 2 and 8 weeks to complete - this needs to be taken into account when recruiting new advisers / arrangers.

The FSA have confirmed that it may take up to three months to approve a CF31 application - therefore it is in the interests of all Firms to ensure that their house is in order.

The Transitional arrangements will mean that applicants that meet the criteria and have the necessary paperwork submitted on time to the FSA will be able to continue to act as an Adviser / Arranger prior to the FSA "sign off".

Next steps from the FSA :

Sept 2010 - Final Mortgage Rules published and new content available on FSA Website
Q4 2010 - Modified Form "A" available in draft
Nov 2010 - Sole Traders / Single Director Firms registered with Umbrella organisations for CRB checks
Feb 2011 - Sole Traders / Single Director Firms apply for their own CRB checks
Feb 2011 - All other CF31 Firms apply to Disclosure Scotland
31 Mar 11 - Start of application period for CF31's and CF10's.
30 June 11 - End of transitional application period.
1 Jul 2011 - Anyone that hasn't applied MUST cease to undertake regulated activities unless a current CF.
1 Jul 2011 - Applications from current CF's requiring CF31 or CF11 to be submitted
1 Oct 2011 - Anyone that hasn't applied for CF31 must cease to undertake relevant regulated activities - even if a CF.

If you need help the please get in touch at http://www.compliantsolutions.co.uk/fsa-problems.php

Online Notifications and Applications

noreply@blogger.com (Ian Cass) — Wed, 09 Jun 2010 13:04:00 +0000

The FSA launched on Monday their new on line facility for Regulated Firms.

http://www.fsa.gov.uk/Pages/Doing/Regulated/ona/index.shtml

In essence, the FSA could not cope with the 20,000 or so expected applications from Mortgage advisers / arrangers next year with the current set up. As a result, they have developed an on line system that becomes mandatory from August 2010.

You will need to register to use the service –

http://www.fsa.gov.uk/Pages/Doing/Regulated/ona/registration/index.shtml

the facility will allow you to complete and submit changes in respect of the following :

Approved persons
Appointed representatives
Passports
Variations of Permission
Cancellations
Waivers
Standing Data

I hope that the systems that the FSA have introduced are more robust than the GABRIEL system that was launched a couple of years ago and still encounters problems.

Treating Customers Fairly III

noreply@blogger.com (Ian Cass) — Sat, 29 May 2010 19:19:00 +0000

Outcome 3 - Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.

Have you updated your initial disclosure material or terms of business to reflect the FSCS changes announced in January? Do your client files consistently record details of information obtained from and provided to the customer? Is the file up to date?

Can you demonstrate that all of your communications are clear, fair and not misleading? your marketing material - do you ensure that any information is "balanced" and important exclusions are prominently disclosed? Would it pass the "mother in law test?"

Where you have more than one adviser working within the business are you satisfied that all advisers operate to a consistent high standard? Are any issues identified as part of the monitoring process recorded and appropriate training provided to avoid any repetition?

How satisfied are you that Customers have a good understanding of information that you have provided? Can you prove it?

Fighting Financial Crime

noreply@blogger.com (Ian Cass) — Fri, 28 May 2010 07:23:00 +0000

The FSA has published the findings of its review into small firms’ anti-financial crime systems and controls, which covered anti-money laundering and financial sanctions, data security and fraud controls. 159 small Firms were part of the review. The findings indicate that the small firms sector is “generally weak in its assessment and mitigation of financial crime risks”. Just over half of the firms reviewed had used outside compliance consultants to produce policies and procedures.

Exciting stuff - generally speaking IFA's need to pull their socks up. As is often the case, business owners will invariably "tick the box" that they have something written down and then either fail to adapt it to reflect their individual needs or simply ignore the process altogether.

Firms are required to have systems in place to verify that they are not being used to facilitate financial crime.

This will include:

Adequate controls on recruitment - including taking up CRB checks where appropriate

Verification of identity and sources of funds

Provision of training to staff on tackling financial crime

Controls over dealing with politically exposed persons (PEPS)

Ensuring that existing and prospective customers are not on the treasury blacklist.

Having strategies in place to identify and tackle potential fraudulent activity / market abuse.

Appropriate due diligence systems to identify or deal with higher-risk customers or situations.

Clear and effective procedures for managing suspicious transactions including reporting to SOCA.

I expect that this will be another topic on the shopping list for discussion when the FSA next turn up at a small firm near you - How do your controls stack up?

For help and guidance contact me at info@compliantsolutions.co.uk

Treating Customers Fairly II

noreply@blogger.com (Ian Cass) — Wed, 19 May 2010 19:02:00 +0000

Outcome 2 - Products and Services sold in the RETAIL market are designed to meet the needs of identified customer groups and are targeted accordingly.

As an Insurance / Investment / Pensions / Mortgages arranger or adviser you may think that this only applies to Product Providers and lenders. Not so - increasingly, firms are looking to offer their clients attractive products that may include an element of "white labeling".

Distributor Influenced Funds seem to be a current "flavour of the month" topic of concern for the FSA - if you are marketing such funds what steps have you taken to be satisfied that you continue to treat your customers fairly?

Insurance Intermediaries - do you operate with a "Binder" and as a result have a facility to direct clients to a specific Insurer? Do you have a profit share arrangement in place and if so, how are you able to demonstrate that you are not "jogging against the pot"? By placing the best risks with the Insurer offering profit share are you maximising your profit opportunity at the expense of the client?

For packaged products are you able to demonstrate that you are selling the right products to the right clients consistently? What levels of business are written on a non-advised / execution only basis? How confident are you that clients have a good understanding of what they are acquiring?

Ignorance is bliss - just because the customer completes a customer satisfaction survey and gives the firm a 10/10 for service does not mean that they have been treated fairly - how do you stack up?

Minimum Capital Requirements

noreply@blogger.com (Ian Cass) — Wed, 12 May 2010 09:57:00 +0000

One of my clients had a run in with the FSA recently - thankfully now all resolved.

Imagine the situation:

You are a provincial IFA doing an excellent job for your clients and have never had a complaint in 5 years trading. Your clients love you and provide a steady stream of referrals.

Having been nagged by me about minimum capital in the business you set aside funds on deposit.

You keep on top of your cashflow and have regular management accounts. A very well run business.

Your year end is 31st December and you make £15,000 profit. Your capital requirement is only £10,000*

On the GABRIEL return for the year ending 31st December you state that your Capital within the Firm is £15,050 including fixed assets and cash etc.

Your Accountant then has eight months to finalise your books and submit them to Companies House and HMRC. During the period between 31st December and when the accounts are finalised you make a further £20000 in profits. Your Accountant suggests that you draw a dividend of £15,000 and charge it to the last year. After all, the interim profits for the current year mean that you still have over £15,000 in the bank.

Wrong. By taking the Dividend from the previous tax year this resulted in the capital position of the Company as at 31 December being only £50. Who ever said that cash was King?

A simple error and easily rectified - the Accountant was able in this instance to provide sufficient comfort to the FSA that the Firm had sufficient resources - better safe than sorry and avoid grief from the FSA and a large bill from your Accountant.

* dates and numbers have been changed to protect client confidentiality.

New FSA Website

noreply@blogger.com (Ian Cass) — Mon, 26 Apr 2010 16:49:00 +0000

The Financial Services Authority have completely updated their website and I must admit the navigation is much better than historically.

One point of detail that they overlooked. All FSA Regulated Firms are supposed to put a link from their website to the FSA register - www.fsa.gov.uk/register This enables consumers to check out the validity of the regulated Firm. The new FSA location is at www.fsa.gov.uk/register/home.do

Firms will now need to replace the link as the old location will generate a HTTP 403 forbidden error.

Joy!

Treating Customers Fairly assessments East Anglia

noreply@blogger.com (Ian Cass) — Thu, 22 Apr 2010 12:48:00 +0000

The FSA have announced the next programme of Treating Customers Fairly Assessments and these are to take place in September and October 2010.

As previously, the assessments will be either by telephone or face to face at a central location.

To help Firms, the FSA are holding a series of TCF Roadshows in the "Region"

Orsett Hall Hotel, Orsett (Essex) 21st and 22nd June.

Huntingdon Marrott Hotel, Huntingdon 7th and 8th July.

Eastwood Hall, Nottingham 21st and 22nd July.

Firms are permitted to send a maximum of two delegates per Firm and bookings need to be made by 28 May. As places are limited it is advisable to reserve a place early.

In July the FSA will inform Firms when their specific assessment will take place and ask for pre assessment information - see my previous article for details.

Those Firms that have policies in place; good management information to support the six key outcomes and have a top to bottom tcf culture have nothing to fear.

Those with issues may be torn between watching the footy and updating their gap analysis.

CP10/10 - Quarterly update of planned changes to the rules

noreply@blogger.com (Ian Cass) — Tue, 06 Apr 2010 11:29:00 +0000

A few interesting nuggets this time (122 pages).

More on Fees

Those FSA have come up with another cunning plan to raise revenues from the Regulated Community. The FSA has a "general Special Projects Fee" (SPF) for certain restructuring transactions. Firms in administration or in liquidation or that become subject to stabilisation powers under COND 3.1. Thankfully, the FSA are not minded to apply these charges to small firms and only where the FSA costs are in excess of £50,000 will the FSA seek to collect this fee.

The FSA "hourly rate" for their staff is as follows:

Administrator £25
Associate £50
Techie £85
Manager £90
others £135

Firms subject to BIPRU will welcome the clarification of the simplified ILAS approach -

This new approach will apply to Firms that hold a simplified ILAS waiver from the FSA. Such Firms will have to ensure that their liquidity buffer is greater or equal to the simplified Liquidity buffer requirement as set out in BIPRU 12.6.9R. Firms will also have to meet the overall capital liquidity rule BIPRU 12.2.1R and carry out an Individual Liquidity Systems Assessment (ILAS) BIPRU 12.6.21R

A new business model restriction is also to be introduced - with a cap of Firms total assets set at £250m.

Firms looking to obtain a waiver will need to get their skates on as the deadline for implementation is 1 June 2010.

Offshore Promotions

Firms approving or communicating promotions for overseas persons will now have to take additional steps to demonstrate why it believes that the overseas person will deal with retail clients in an honest and reliable way.

Changes to reporting data

FSA001 - Gilts should be in data element 7. Long Term debt securities should be reported on data element 10.

FSA002 - Interest paid on swaps entered into for the purposes of hedging interest rate risk should be reported in data element 31B.

FSA005 - Market Risk Firms need to ensure that their Market value of their equity holdings in data elements 22G and 24G is accurate as these Figures will then be used by the FSA to calculate the Firms Position Risk Requirement - Firms will need to amend their PRR according to the profit / loss that they would make on certain convertible debt positions if they were executed..

FSA 0019 - Pillar 2 information, The FSA are to add in new questions regarding "winding down" costs.

GABREIL Section A: Balance Sheet for Insurance Intermediaries subject to MIPRU

The FSA are concerned that Firms have not adequately considered the implications of financial risks posed by other members of the business group.

Firms will be required to calculate "amounts owed by group undertakings; and amounts owed by undertakings in which the company has an interest".

This also applies to unincorporated businesses.

Firms will be expected to record in their current assets amounts owed by directors, group undertakings or undertakings in which the Firm has an interest. This amount will need to be recorded as a memorandum item.

Where Insurance Intermediaries include shares in group undertakings as part of their investments such items are held as current assets. Again, the Firm will need to record this as a separate memorandum item.

These changes will come into force 31 Dec 2011.

Changes to the Controllers' regime

More clarity. Concert parties etc threshold is 10%

S 178(1) of FSMA requires Firms to give formal notice to the FSA prior to concluding an agreement to make an acquisition

Service Standards

A fudge. The FSA are dropping their "hard wired" service standards for processing applications for controlled functions. Could this have anything to do with the 20,000 or so CF30 applications expected from Mortgage Brokers and Arrangers next year?

CP10/9: Enhancing the Client Assets Sourcebook

noreply@blogger.com (Ian Cass) — Tue, 30 Mar 2010 17:10:00 +0000

The FSA machine for producing new Investor Protection measures continues with this latest 80 page Consultative Paper aimed at tightening up the CASS Sourcebook in the light of the Lehman Bros saga.

Thankfully, this only extends to those Firms involved in Prime Brokerage that handle Client Assets - and does not extend to Insurance Brokers!

Re hypothecation - Firms will be required to include contractual provisions to be summarised in a disclosure annex to the PBA. The objective is to highlight relevant definitions including that of net client indebtedness and contractual limit on re-hypothecation. It will include a statement setting out the risk to the client upon the prime broker’s default and cross-reference detailed provisions in the PBA. This in turn may help reduce the time required for legal due diligence undertaken by an insolvency practitioner following a prime broker’s collapse.

Daily reporting - Firms will be required to provide clients with access to up-to-date information regarding their accounts.

Client Money - a maximum of 20% may be held internally within Group Client Money Accounts.

New SIF - Controlled Function - One of the Senior Executives within the Firm will have to assume full responsiblity for Client Assets oversight - and will need to be able to demonstrate that ongoing controls are in place.

CMAR - new reporting requirement. Firms will be required to submit Monthly reports to the FSA. Those Firms that are categorised as "Small" will be required to complete CMAR returns on a half yearly basis.

Comments on this Consultative Paper are invited by 30th June 2010 - and our friends in Europe may also have a view.

Unsuitable Investment advice

noreply@blogger.com (Ian Cass) — Fri, 26 Mar 2010 10:08:00 +0000

The latest paper on COBs - Conduct of Business (cobs) post-implementation review: final statement on findings is an excellent read for those suffering from Insomnia!

Having required Firms to bombard Clients with mountains of information in a prescribed manner for many years finally common sense has prevailed. Most of the "bumpf" rarely gets read by consumers and often finds its way into the wpb. How many trees have been sacrificed in the name of "investor protection" I wonder?

The latest "final" statement still leaves a number of unanswered questions. COB's 9.4 might be extended to cover additional asset classes in the future. Here, the FSA are talking about suitability reports to retail clients covering unregulated collectives; CFD's and certain structured products.

The paper also makes reference to the relaxation in the rules concerning "wealth warnings". Firms are reminded to only use those that are appropriate and relevant to the specific Financial Promotion. If you are not quoting past performance data then there is no need to state "past performance is not a guide to the future". Firms can also target their marketing towards specific market segments and use appropriate language - but few are at present.

Interstingly, the Paper highlights current FSA thinking on unsuitable advice :

The customers needs and circumstances have not been met;

The recommended Product exposes the customer to an inappropriate level of risk including overconcentration of assets in a single product or product type.

Recommendation failed to meet the customers tax needs

Are you able to demonstrate on your client files that the outcomes meet client requirements?

CP 10/7 - Call recording - exemption to be removed

noreply@blogger.com (Ian Cass) — Sat, 20 Mar 2010 08:16:00 +0000

The FSA have published Consultative Paper CP10/7 regarding the removal of the exemption for recording mobile phone messages. Comments are invited by 14th June 2010.

The FSA are not planning on extending the recording requirements beyond those Firms currently caught by COBS 11.8 - Banks, Investment Houses, Hedge Funds and the like - MIFID Firms are caught but IFA's, Insurance or Mortgage Brokers are not.

From Q4 2010 Firms will be required to have in place adequate arrangements to capture, store and retrieve "relevant" calls made on hand held devices - this may take the form of voice, SMS, IM or video messaging. Records will need to be available for 6 months.

Data protection issues regarding the capture of "personal" conversations and messages have been addressed. The FSA expects Firms to have in place arrangements to ensure that business calls are only made on Firm supplied / sponsored equipment. Looks like everyone will therefore be expected to keep two phones - one (recorded) for business and a personal phone for non business stuff.

I am sure that this is going to open up a significant can of worms and smacks of big brother.

the rationale behind it is that it closes a loophole - but what is going to stop the deliberate transgressor who simply has a third phone for doing the "dodgy deals?". The objective is to provide more evidence of a contemporaneous nature and prevent Market Abuse.

Staff that play by the Rules have nothing to fear from over zealous Compliance Officers.

I wonder what this will do to the share price for Information Technology Companies who are able to provide elegant solutions?

Here comes Hector

noreply@blogger.com (Ian Cass) — Wed, 17 Mar 2010 09:17:00 +0000

I guess that my blog last Thursday was timely. last Friday Hector Sants, CEO at the FSA delivered the Annual Lubbock Lecture in Management Studies.

UK Financial Regulation: After the Crisis. Interstingly, his speech identified two key drivers that the FSA need to address:

1. Poor prudential rules and polices - something that the FSA and earlier regulators have been responsible for tinkering with since 1988. Conveniently, the EU is cited as the driver behind many decisions. That however has not stopped an element of "gold plating" by UK Regulators since A day - (April 1988).

2. Supervisory practices - ensuring that the prudential rules and policies are adhered to by practioners.

The new approach that is to be adopted is "Outcomes based" and delivered through intensive supervision. Historically, the FSA would be reactive to a problem. Going forwards, I believe that the FSA will be looking for problems BEFORE they happen - proactive rather than reactive - about time too.

We can expect :

More product regulation

Earlier interventions across a sector

Better integrated risk modelling

Greater use of Mystery shopping

Increased site visits

The aim of this is threefold:

To improve the long term efficiency / fairness of the market

Deliver intensive supervision - TCF as an example

Ensure that appropriate redress and compensation is secured to provide a Visible deterrence to those individuals and Firms that transgress.

Applications for Part IV permission and VOPs

noreply@blogger.com (Ian Cass) — Thu, 11 Mar 2010 21:12:00 +0000

The published statutory service standard for completing "clean" applications and VOPS is 6 months and 12 months for incomplete applications.

Many Firms will have experienced delays with their applications and the FSA have taken action to improve matters. Back in November 2009 some 300 applications took in excess of 5 weeks to be assigned to a Case Officer. this figure has since reduced to some 100.

As each Case Officer is likely to have up to 20 ongoing applications it is particularly unhelpful if applicants or their advisers keep hassling Case Officers on a daily basis.

The FSA have recruited additional staff to handle applications and further staff will be joining the Permissions, Decisions and Regulatory Reporting Team over the next few weeks.

Applicants are under much closer scrutiny than previously - the onus is on the applicant Firm to demonstrate competence and does the application stack up?

Does the business plan support the planned business model?

Are the Owners / Managers of the business competent to run a Regulated Firm?

Have there been any past issues involving the Directors - previous businesses going into Administration etc?

Where does the Capital for the business come from?

Do the staff dealing with customers have the necessary skills, knowledge and qualifications to advise clients?

What IT systems will be adopted?

Is there a "believability factor" with the application?

The FSA have noted that most applicants now use the services of professional advisors - Accountants or Compliance Consultants. Whilst this is helpful, the FSA still require the main contact for the application to come from within the business.

It was a breath of fresh air for the FSA to admit their shortcomings - and demonstrate the steps that they had taken to speed up the process for dealing with applications.

Those Firms that are currently Authorised should review their current permissions and where necessary apply to deregister any that are no longer required. Permissions as at the end of March determine the fee blocks applicable for the following 12 months. The FSCS fees can be onerous and there seems little point paying unnecessary fees. Some 30% of VoPs are received during February and March.

Time to review your permissions.

RIP Principles based regulation?

noreply@blogger.com (Ian Cass) — Thu, 11 Mar 2010 09:51:00 +0000

I hope not - but fear that the FSA are now moving to an era of Enforcement Based Regulation. In recent years we have seen a steady increase in the number and size of Regulatory Fines.

Currently there are some 18,000 Firms classed by the FSA as Small Firms and regarded as low risk. Such Firms have managed to slip under the regulatory radar and avoid intensive supervision. Things are about to change.

The Treating Customers Fairly project has been moved within the FSA to "Business as usual" and 2/3 of Firms have now had their initial contact so far.

Over the last 6 months the FSA have recruited seasoned professionals with a detailed market knowledge in order to beef up their supervison teams. We can expect a shift form a reactive to a proactive approach going forwards.

The FSA have developed an updated risk profiling tool - GABRIEL returns should correspond with the appropriate return at Companies House. The FSA are keen that professional advisers including Accountants are mindful that the records must demonstrate the Financial Integrity of the business - including Capital Adequacy.

A new feature that the FSA have added in is "believability test" - does your GABRIEL return appear reasonable and sound? How does it compare with previous returns? Is there a skew to your product mix? Do you have any adverse comments appearing on the ELIXIR system run by the Life Offices?

So what you may ask? But an increasingly politicised FSA seems to be using high profile fines and prohibitions and a visible deterant. Yet Firms still get it wrong. Anecdotal evidence indicated that where historically a breach had taken place and reported to the FSA in good time no further action took place. Not any more.

Last year saw 80 Mortgage Brokers having their licences removed and the businesses closed down as a result of FSA intervention. The Mortgage Market Review has suggested that those Individuals engaged in advising or arranging Mortgages will become a controlled Function. Interestingly, it looks as if the FSA have already decided that is a good idea and are pressing ahead with developing an on line system for processing the 20,000 or so anticipated applicants. Some 5,000 of which are likely to be treated as non-routine and warranting further dtailed investigation.

Currency fluctations and PI Insurance

noreply@blogger.com (Ian Cass) — Wed, 03 Mar 2010 16:46:00 +0000

Last March new minimum levels of cover came into force for those firms conducting non investment insurances - ie those firms that advise and arrange Insurance business.

The new limits were brought about by the Insurance Mediation Directive (IMD) - in line with the increase in the European Index of Consumer Prices, over the five-year period since the IMD's entry into force.

Firms must now have a minimum level of cover of €1,120,200 for a single claim and €1,680,300 in aggregate.

The FSA expects all such policies to at least meet the minimum level of cover at the outset and throughout the duration of the policy.

Most PI policies however determined in British Pounds - the recent exchange rate fluctation has meant the Sterling equivalent sum insured has fluctuated over the last 120 days sharply:

Highest (Oct 13th 2009) 0.940801 - £1,190,688 - single claim
Lowest (Jan 28th 2010) 0.8616 - £1,300,140

2nd March 2010 0.906351 - £1,235,946

(source www.x-rates.com)

Care is required by Firms to ensure that adequate cover is in place - the onus is on the Firm and not the FSA.

Time to check your level of cover.

Threshold Condition 4 (TC4)

noreply@blogger.com (Ian Cass) — Thu, 25 Feb 2010 19:01:00 +0000

The FSA do not make it easy to find Threshold condition 4 - you need to go to the COND section of the FSA Rulebook and then having clicked on COND2 you need to click on the link 2.4 To find Threshold condition 4: Adequate resources!

In a nutshell, a regulated firm must maintain adequate resources at all times to meet the minimum solvency requirements - and be able to prove that the senior management have their finger on the pulse. can you? Note that I deliberately did not simply state "Financial resources" as TC4 is much wider than simply pounds shillings and pence.

If the Regulated Business is part of a larger Group the FSA will take this into account - but there may be additional risks due to financial pressures placed on other members of the Group. How many small IFA's have the luxury of a defined benefits pension scheme - let alone one in deficit?

The FSA interpret the term 'Adequate' as meaning sufficient in terms of quantity, quality and availability. "Resources" includes all financial resources, non-financial resources and means of managing its resources - Capital / People and Risk Management.

Examples of early warning signs include:

Deterioration in credit scores

Any indication that a Firm is unable to meet its debts as they fall due - is there a danger that a former sales associate could complain due to no payment of commission?

In addition there are the more obvious ones - entering a CVA or IVA; becoming bankrupt or entering liquidation - either the Regulated Business or one caught by the "Close Links" rules.

The Rules also require Firms to have appropriate controls in place to identify and measure regulatory issues - have a look at COND 2.4.6G and SYSC 3.1.

If the Firm is Authorised to handle Client Money has appropriate due dilligence been undertaken regarding the probity of the Institution? I must admit, I thought that was the job of the FSA who after all are responsible for Regulating the Banks. If Client Money is held is it retained in a separate designated client account? Is the money safe and are you reconcilling your ledger balances at least once every 25 days? can you prove it?

Treating Customers Fairly - I

noreply@blogger.com (Ian Cass) — Wed, 24 Feb 2010 12:24:00 +0000

We can all remember when we last received good or exceptional service from a supplier - how did you feel about them and what did you do about it? I recently had a slow puncture and took my car in to the local Kwik Fit garage. Whilst waiting to speak to the chap behind the desk I noticed that they now do car servicing. Having left the keys I went back to the office.

A few hours later I got a phone call - Mr Cass, your car is ready. They were also open until 6pm and I was able to finish my afternoon meetings before collecting the car. How much was the bill I asked? The manager said - no charge - you are a regular client and it was only a faulty valve. No prizes for guessing where I will be taking my car for servicing from now on.

But a happy and content customer doen't mean that you have treated the fairly. Ignorance is bliss - until someone points the error of your ways. So what does this mean for Regulated Firms?

The FSA has set 6 key outcomes that they expect Firms to adhere to.

Outcome 1 - Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.

So, can you prove it? What management Information do you have available to demonstrate that you are complying with outcome 1?

Have you completed a Treating Customers Fairly self assessment/gap analysis and then produced an action plan? Have you reviewed and repeated this exercise at least annually?

If you have retained the services of an outside Compliance consultant - have they undertaken an independent assessment / peer review?

Have you asked members of your team for their ideas? Is this a regular topic at team meetings and has it been recorded?

Do you have square pegs and round holes? Have you recruited the right people to do the right jobs and have they been trained and coached accordingly? Does their ongoing CPD include TCF?

Testing and measuring - what monitoring and feedback are you providing - staff performance against relevant TCF related measures?

Have you set SMART Key Perfomance Indicators? (for example, key performance indicators in areas such as complaints received, cancellations, lapses,
products sold by type/provider etc.)

Are you providing the leadership and direction to your team? Is it TCF focused?

How do you handle any conflicts of interest?

This is not an exhastive list but as you can see - the bar has been set high by the FSA. Most Firms do have a TCF culture - treating their customers as they expect to be treated; keeping their promises and offering good customer service and fair value. After all, if we dont look after our clients then there are plenty of Bankassurance direct salesmen/women that would love to flog policies to your clients. Pity that the FSA seems to focus on IFA's who generate 3% of FOS casework -rather than on the Big Institutions who account for the othre 97%

The Golden Fleece?

noreply@blogger.com (Ian Cass) — Tue, 23 Feb 2010 13:10:00 +0000

...before you ask, it is the name of the Pub that I am writing this blog from in the City :o)

Back to the script.

1st December 2001 was an interesting day - the Birth of the Financial Services Authority (FSA) as we know it today. Will it make its 10th anniversary - I wonder?

Another shuffle of the deckchairs as NASDIM became FIMBRA, which merged with LAUTRO to form the PIA. Then all of the SRO's combined to form the FSA - a single unified Regulator with clear statutory objectives of :

Market confidence in the financial system;

Promoting public understanding of the financial system;

Investor / Consumer protections

Fighting financial crime.

In 2003 no one saw it coming - the FSA, with a detailed set of Rules shifted to "Principles based Regulation" - focusing on outputs rather than strict adherence to detailed rules. How is what you are doing supporting Treating Customers Fairly?

Simply having a happy customer didn't mean that you had treated them fairly and many accepted customs and practices had to be revisited and tweeked. Firms were given ample time to implement TCF within their businesses - and collect management information to be able to prove how Treating Customers Fairly was embedded within their business. Easy when you know how - ask me :o). And then the FSA Interviews started.