Compliance spotlight continues to shine on the financial services sector

May 10th '16

Pressure on financial services compliance shows no sign of easing

It’s fair to say that financial services firms have been under the cosh over the last few years.

Almost daily headlines about mis-selling scandals, dubious corporate ethics and a culture that – according to headlines – prioritises bonus payments over good governance.

And while certain accusations may be justified at some firms, the majority of banks, asset managers and other financial firms strive to operate ethically and to achieve regulatory compliance.

The pressure on financial services firms shows no sign of letting up, though.

National Audit Office report on ‘Financial Services Mis-selling: Regulation and Redress’

In February, the National Audit Office (NAO) published a report on how effective the Financial Conduct Authority (FCA) is in dealing with – and preventing – mis-selling.  The report’s findings were not kind to the regulator. In the words of barrister Peter Hamilton, writing in Money Marketing, ‘The conclusions were damning’.

The report’s summary questions the FCA’s ability to take a ‘big picture’ approach to its interventions:

‘…it does not yet systematically draw together aims and success criteria of related interventions, evaluate how they fit together, or link the outcomes of intervention to their costs. This creates a risk that interventions may not be well coordinated, and means that the FCA cannot be sure that it has chosen the most cost-effective way of intervening.’

This inability of the regulator to measure the cost-effectiveness of its actions is a theme repeated in the report, and identified as a potential barrier to prioritising.

The NAO concludes that the FCA doesn’t have a full understanding of the costs of its activities, which ‘could hamper its decision-making.’

What does this mean for financial services compliance?

While this report looks at the FCA, rather than the industry, it can be assumed that if the regulator’s approach to mis-selling is lacking, the industry stance is likely to also fall short of what the NAO would expect.

And if the regulator’s approach to compliance is seen as ineffective, it is more important than ever that firms proactively self-regulate. This is a theme the FCA themselves have been keen to push over recent months, as Perivan Solutions have covered extensively in blogs on compliance culture, sustainability, the regulator’s Business Plan and the appointment of its new chief executive.

Taking a proactive approach to compliance is increasingly seen as the only way to ensure good corporate governance. While your Compliance team and CF10 (chief compliance officer) may have ultimate accountability for regulatory compliance, the whole business plays a role in ensuring you meet FCA requirements.

Too often, Compliance professionals complain of being bogged down in admin. Reviewing and approving financial promotions can involve high levels of repetition and duplication. Processes can be labour-intensive, with a focus on manual over automated procedures.

As well as slowing down review and sign-off, a reliance on manual processes increases the chance of human error. The likelihood of mistakes, omissions and non-compliant financial promotions or operations is therefore also increased.

Suitability of advice – FCA writes to 700 advice firms

Another headache for regulated firms is also on the horizon.  The FCA is writing to around 700 advice firms ahead of a supervision exercise focusing on the suitability of advice.

This exercise follows on from the regulator’s thematic review into suitability of advice.

In total, the FCA plans to collect more than 1,000 client files during the exercise. File requests will mainly be targeted at 500 smaller firms. The amount of files requested is expected to be in proportion to firms’ market share.

What is the FCA looking for?

The regulator’s reviews of the files they receive are expected to focus on:

  • How firms assess suitability of products and solutions
  • How firms document their investment and research processes

Any firms that cannot provide evidence of the way they determined whether products and services were suitable for certain customers are likely to be the subject of further scrutiny.

What does this mean for firms?

For the firms within the scope of the exercise, it will mean extra work in terms of digging out the reports and evidence required to show that they followed the correct practice on suitability.

For any that can’t evidence compliant behaviour or processes, it will undoubtedly create pressure and worry about the potential implications.

And for firms that are not under the microscope in this exercise, the FCA’s actions should act as a timely reminder that regulatory requirements need to be met – and any evidence recorded in a compliant way. Record-keeping and archiving your approach can be as important as the approach itself.

Here too, reducing manual processes can help to ensure that correct procedure is carried out and documented correctly. Minimising the opportunity for human error to creep in can make a big difference. Automating compliance and marketing processes not only makes them more efficient – giving your Compliance team ‘breathing space’ and the ability to manage their role in a less time-pressured environment – it also mandates steps in the process, preventing non-compliant financial promotions or approaches slipping through.

These are just two examples of the Compliance spotlight continues to shine on the financial services sector. It probably wouldn’t take a lot of digging to find more. The pressure on financial services continues unabated.

Only by stepping up and taking a proactive approach to compliance – and making the most of the tools and tips that can ease your compliance burden – can firms hope to keep their head above the regulatory waters.

Perivan can offer you a free consultation on the issues you face and the ways you might solve them. Alternatively contact us who will be able to advise on good and bad practice of financial promotions within the financial sector, or could assist with Advertising Reviews, Copywriting or even Design work. Contact us today.