Investment Firms

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1. Anyone for a Christmas quiz?
2. TCF – The End at Last?
3. “Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect”
4. Does your platform need extending?
5. FSA themed visits – financial crime
6. Bogus FSA & FOS communications
7. Retail distribution review feedback statement
8. Corporate financial planning – fact finding & risk profiling
9. Suitability letters – timely reminder
10. FSA themed pension transfer visits
11. Approved persons as at 31st December 2008

Ladies & Gentlemen

Please find enclosed the latest compliance and industry news.

As usual, sit back and enjoy!

Kind Regards

ateb consultants

Which article applies to me?
Please use the following table to decide which article applies to you, if any:

	1	2	3	4	5	6	7	8	9	10	11
Directors/Partners
Compliance / A&O Function
Money Laundering Officer
Advisers & Trainees
T&C Supervisor
Pensions Transfer Specialist
Back Office
Mortgage Related (M)	M	M	M			M	M		M

 

1. Anyone for a Christmas quiz?

Article Removed

Ateb view:

Action required by you:

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2. TCF – The End at Last?

I’m afraid not.

Contrary to reports of its premature demise, TCF is alive and well. Furthermore, we can report that the FSA, like the Tin Man from the Wizard of Oz, does in fact have a heart - what other regulator would have had the decency to coincide Christmas with the deadline for implementing TCF?

By this month, you must be able to prove, through management behaviours, that you consistently treat customers fairly. It should now be part of your culture. Staff should be familiar with the 6 Outcomes and have a working knowledge of the FSA Principles. They should be able to discuss how the 6 outcomes impact on their day-to-day job – clear communication, service levels, suitability, etc.

Management should be able to demonstrate that TCF gap analyses, audits and action plans have been implemented and that management information (MI) includes TCF statistics that support your TCF initiatives. Importantly, you should be analysing your MI and looking for trends.

When the FSA refers to a TCF Culture, it expects the firm to demonstrate this through strong leadership and excellent controls, by incorporating TCF into business strategies, by ensuring that recruitment and T&C regimes attract and train the right people and by rewarding staff not purely on the basis of business generation, but also for compliant, ethical and professional business practices.

While the scope of your TCF initiatives will depend of the size and complexity of your firm, fundamentally, it applies to all firms, regardless of whether you have 1 or 100 staff.
If you can read the above with a confident air and swagger, then well done; if you cannot, then we suggest you review your TCF strategy.

Now, unlike the Tin Man who achieved his desired outcome i.e. he reached the end of the rainbow, this is not, unfortunately, the end of the story for you. TCF initiatives should be carried forward and we recommend that you build regular TCF reviews into your compliance schedule.

With regard to an FSA visit – please expect one.

Here are some quotes from an FSA statement issued in November:

“TCF remains central to the FSA's retail strategy, and firms are expected to meet the December 2008 deadline”.

“We will continue to challenge firms rigorously where there are issues and take decisive action where necessary”.

“The standard against which firms will be judged remains high, and the penalties for not complying remain tough.”

“The progress of small firms will be assessed via the three-year regional assessment programme ........ and aims to cover 11,300 retail intermediaries over three years”.

 

Ateb view:

TCF is alive and kicking

Action required by you:

If you haven’t reviewed your TCF progress for a while, now might be a good time.

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3. “Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect”

Do you recognise this quote?

Give yourself some brownie points and an extra half glass of mulled wine if you recognised it as TCF Outcome number 5.

We think that this is probably the most important outcome because it encapsulates the TCF issue for smaller firms – are clients getting what they expect?

Ask yourself some questions, for example:

• When they become clients of yours, do they understand what level of service they can expect?
• Are they expecting you to regularly review their investments?
• When they come to make a claim, could there be any unexpected problems (e.g. client not covered)?

Achieving this outcome is beneficial to both you and the client:

• they know what they’re getting;
• you reduce the risk of complaints.
  

 

Ateb view:

Clear communication is undoubtedly the key to achieving this outcome.

Action required by you:

We would recommend that you constantly review your documentation with this outcome in mind. Why not challenge your staff to come up with initiatives and improvements?

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4. Does your platform need extending?

The FSA published Policy Statement PS08/9 “Organisational systems and controls – are extending the common platform” in September. The provisions will come into force on 1st April 2009; this date has been extended from the original proposed date of 1st October 2008.

This article is mainly applicable to home finance and insurance intermediaries together with those investment firms not already subject to the MiFID rules. Most other firms are already caught by these “Common Platform” requirements.

The Common Platform was first seen as part of the arrangements made to implement the MiFID & CRD Directives. The FSA has confirmed that it will extend the “Common Platform provisions” to nearly all firms not already subject to them. The provisions concern the organisational and systems and controls requirements in the common platform (by which is meant Chapters 4-10 of the Senior Management Arrangements, Systems and Controls sourcebook [SYSC]).

The common platform covers areas including compliance, business continuity, risk control, outsourcing and conflicts of interest:

General Organisational Requirements
The firm must have robust governance arrangements including clear organisational structure and reporting lines, effective systems for the identification and management of risks and appropriate administrative, accounting and information processing systems. The firm must also have experienced and reputable management and appropriate internal management practices and allocation of responsibilities.

Employees, Agents and Other Relevant Persons
Personnel employed by the firm must have appropriate skills, knowledge and expertise to carry out the functions allocated to them.

Compliance (including Internal Audit) and Financial Crime
The firm must have and maintain appropriate policies and procedures to enable the firm to comply with its regulatory responsibilities. Where appropriate to the nature and scale of the firm’s activities, an independent internal audit function must be maintained. The firm must also establish and maintain appropriate systems and controls to enable it to identify and manage money laundering and other financial crime risks.

Risk Control
The firm must establish and maintain adequate risk management policies and procedures that identify the risks to the firm’s activities and, as appropriate, establish the level of risk the firm is prepared to tolerate.

Outsourcing
Where appropriate, the firm must ensure that it takes appropriate measures to avoid undue additional operational risks arising through any outsourcing arrangements. Outsourcing will not be undertaken where this affects materially the firm’s internal controls and prevents the FSA from monitoring the firm’s compliance with its regulatory obligations.

Conflicts of Interest
The firm must have appropriate systems to identify and manage conflicts of interest between the firm (including its staff and, if any, it’s appointed representatives) and a client or between one client and another client.

The FSA confirmed that, with certain exceptions on areas such as outsourcing and managing conflicts of interest which will be subject to new provisions, firms complying with the existing provisions in SYSC 2 and 3 now will not need to change their behaviour when moving to the common platform.

 

Ateb view:

We would like to think that most firms will already be complying with the majority of these requirements, but there is likely to be some work required (see below).

Action required by you:

Firms will need to review their existing senior management arrangements, systems & controls to assess their adequacy for the common platform requirements and consider also whether any changes are needed to cope with the further specific provisions on outsourcing and conflicts of interest.

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5. FSA themed visits – financial crime

The FSA is undertaking financial crime themed visits to about 200 advisory firms, big and small.

Although we accept that General Insurance & Mortgage Firms are not subject to the FSA SYSC detailed money laundering rules and Money Laundering Regulations 2007, they are subject to Proceeds of Crime Act 2002 (POCA), Terrorism Act 2000, the Anti-terrorism, Crime and Security Act 2001 and the FSA SYSC (General requirements).

We, therefore, think the following information is useful to ALL advisory firms, so please take note:

Here is the gist of what takes place and what you should be aware of:

• 3 hour interview
• No file checks
• Request for pre-visit information includes financial crime procedures, Money Laundering Officer’s Report (investment firms only) and pre-visit questionnaire
• They also wanted to see Anti-money laundering verification procedures
  Questions centred on client data security and fraud potential
• They asked whether the firm had a fraud policy, but were not too concerned where the answer was ‘No’ (we haven’t seen the report yet though)
• They were interested to know whether TCF reviews and gap analyses included customer data security
• Training – is financial crime and related company procedures included in induction and ongoing staff training?
• Do you have a confidential waste policy / procedure?
• Do you have a clear desk policy, lockable cabinets, etc?
• Who has access to the offices?
• What do you do with old computers?
• Are there security checks undertaken when clients request sensitive information over the phone?

Finally, the FSA has recently, for the first time, fined a firm and its money laundering reporting officer for not having adequate anti-money laundering systems and controls.

Ateb view:

The potential for financial crime exists for small and large companies, so you need to be vigilant. You could be exposed if a financial crime arose out of your lack of internal control or inadequate procedures.

Action required by you:

Consider these comments carefully and decide whether you need to take further action. You may wish to talk to ATEB or click here which provides more general information.

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6. Bogus FSA & FOS communications

The catch
The FSA are aware of a number of bogus communications claiming to be from the Financial Services Authority (FSA) or the Financial Ombudsman Service (FOS) – which ask the recipient for personal information or money.

The FSA warns - Don't respond!
These bogus communications are often in the form of emails or letters and they sometimes use the name of current or former employees. They are likely to be linked to organised fraud and they strongly advise that you do not respond to them in any way

Protect yourself
If you are in any doubt about the authenticity of a communication from the FSA or FOS, whether that is a letter, email or other form, please contact one of the relevant telephone numbers below:

For FSA-related communications:
Authorised firms in the UK – 0845 606 9966 (call rates may vary)

For FOS-related communications:
0845 080 1800 (call rates may vary). For media enquiries please see the FOS news update in Related links.

Ateb view:

If firms haven’t got enough to consider with potential FSA communications, we now have to take into account they could be Bogus??

Action required by you:

Be on your guard and remember that the FSA would never call or email you for personal data.

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7. Retail distribution review feedback statement

The FSA’s RDR statement has been met with a mixed response from different corners of the industry, with AIFA and many IFAs criticising all major proposals.

Here are the key points.

Under the review the regulator is set to introduce independent advice and sales advice channels, with both sides required to hold the Qualifications and Curriculum Authority (QCA) level four qualifications, such as the Diploma of Financial Planning, by 2012. Designated specialists may require higher qualifications.

The new ‘sales channel’ is set to cater for advisers giving restricted advice, including tied agents, guided sales and execution only. However, the regulator acknowledges that further consultation is needed on how to implement the changes in a way that will make them clear to consumers.

The move signifies a shift from the simple landscape outlined in April, which suggested only one type of adviser with a definitive separation between advice and sales.

Independent advice will be where adviser firms provide recommendations that are unrestricted and unbiased and consider all investments and providers from across the market to ensure they meet a customer’s needs.

Independent advisers will be required to agree the cost of financial advice with customers up-front, removing the possibility of commission bias and provider influence, ensuring the cost of all advice is clear to consumers, whenever it is given.

Product providers will be permitted to facilitate payments to advisers through the customer’s product or investment. However, by the end of 2012, any payment for advisory services made through the customer’s product or investment must be funded directly by a matching deduction from that product or investment made at the same time as that payment. This will involve the ending of indemnity commission and ‘factoring’ by providers by the end of 2012.

For customers to understand clearly the different services being provided and to recognise the value of advice, separate disclosure is required of the costs of advisory services from product costs for both independent and non-independent advisory firms.

Firms will face increased capital requirements and have to move to expenditure-based calculations. The minimum capital floor will double from £10K to £20K. Further consultation is planned. There will be no regulatory dividend for good corporate behaviour, as expected.

Another major proposal of the review that angered advisers was the FSA’s decision not to reintroduce a 15 year time limit on complaints against advisers.

Ateb view:

I’m sure you will be hearing a great deal more about this topic over coming months.

Action required by you:

Note the qualification requirements – plan your route to the diploma now!

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8. Corporate financial planning – fact finding & risk profiling

When advising corporate clients, who do you fact find? Who do you risk profile?

You need to be careful here, because if you are providing retirement planning advice for the company (not the individual), then it is the company that is, quite often, taking the risk. This is particularly important in small companies, where it is easy to risk profile one of the directors say, whereas it is the company that quite often carries the risk of, for example, under-funding of an EPP.

Individuals’ requirements may not reflect those of a company as a whole, particularly when it comes to risk profiling.

Ateb view:

It is important that you take account the needs and objectives of the company, as well as individuals.

Action required by you:

Review your processes. Inform advisers. Look for this in file checks.

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9. Suitability letters – timely reminder

“Please note that the risk of you receiving an FSA inspection visit can go up as well as down”.

Currently, however, the risk is pretty high!

So, on this cheerful note, it is worthwhile reminding you of what the FSA expect. While it is true to say that what makes a good suitability report is subjective, it is prudent to focus on the FSA’s expectations. The following is a synopsis taken from their website:

The purpose of a suitability letter is to explain to the customer how and why your recommendations are suitable, having regard to their personal and financial circumstances.

Good practice would suggest that the report should:

• be fair, clear and not misleading
• use clear and plain language
• be tailored to your customer
• give a summary of a customer’s objectives, needs, priorities and goals
• explain the reasons for recommendations and how they relate to the above
• highlight the risks associated with the recommendations
• explain the costs, charges and potential penalties attached to the recommendations
  provide a balanced view
• highlight any objectives not addressed
• Note where ‘focused’ or ‘limited’ advice has been provided and the implications therein
• highlight how the customer will be advantaged or disadvantaged by the advice
• not be overly long considering the recommendation being made
• include a clear summary of a customer’s objectives, needs, priorities and goals
• include a summary of relevant existing investments
• use bold text to highlight key risks and issues
• use the customer’s own words to add relevance to the recommendations
• be sent to customers in advance of second meetings and fully discussed at the meeting.
  

Ateb view:

You will have seen this before and it is common sense stuff – but you know what they say about common sense! There is no doubt that this continues to cause the FSA concern.

Action required by you:

Why don’t you ask someone who you trust and is not involved in financial services to assess your suitability letter?

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10. FSA themed pension transfer visits

This thematic project looks at transfers into PPs and SIPPs and examines various risks arising out of ‘A’ Day Changes. This work has been undertaken because the FSA assumed responsibility for the regulation of SIPPs from 1 April 2007 and because there has been a significant rise in such transfers since ‘A’ Day.

We have collated some of the key issues noted to date, although the FSA will in due course publish full feedback.

Quality of Advice

1. Information about the ceding scheme was weak, in particular, inadequate information recorded about:
   • costs
   • alternative funds available
   • fund performance.
2. Poor record keeping - fact finding and risk profiling.
3. Lack of evidence to demonstrate the need for the transfer.
4. Failure to discount stakeholder as an alternative.

Systems & Controls

1. Where compliance issues are identified, either internally or by external consultants, there is very little trend analysis.
2. Again, where compliance issues are identified, there is limited evidence of follow through and proactive management to avoid the same issues arising again.
3. A blanket approach is often used to monitoring with very little risk based assessments (e.g. file checks based on product recommended or competency of adviser).
4. Very little trend analysis of compliance monitoring.
5. Poor record keeping standards – information kept ‘in people’s heads’.
   

 

Ateb view:

The FSA’s supervision is risk based and pensions transfers is obviously an area they consider to be high risk. They will not hesitate to fine firms who persistently fail to meet the required standards. More detailed reports are to be issued by the FSA and there will be a follow up article in our next newsletter.

Action required by you:

Most of you will be active in this area to some degree. Please ensure that you monitor the quality of business written and that both the adviser and supervisor carry adequate knowledge and experience to write and supervise the business. You should also monitor the information being issued by the FSA currently and in the New Year.

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11. Approved persons as at 31st December 2008

Reminder.

The FSA uses the number of Approved Persons registered in Control Function 30 as at the 31st December 2008 to calculate your 2009 / 2010 fees and levies. Amendments made to the Register after 31 December 2008 will not affect tariff data for 2009/10.

Ateb view:

If you have people ‘moving on’, submit your forms to the FSA well before December. If you are recruiting and it is feasible, you may want to delay the appointment.

Action required by you:

To review the number of Approved Persons registered for your firm, please check the FSA Register.

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Important Note:

The ATEB Newsletter is intended to provide general guidance on areas of compliance and T&C; however it is not a replacement for the main Rules and Guidance contained within the FSA Handbook. We welcome all feedback. If you have any feedback or questions relating to any articles then please direct them to your local ATEB consultant or the newsletter editor Steve Bailey email steve@atebconsulting.co.uk Unless you have consulted specifically (as part of a regular visit) with ATEB on a particular issue then ATEB Consulting accept no liability for any actions taken based on the information contained solely within the newsletter.

Contact Us:

Ateb Consulting
The Old Post House
29 Nedderton Village
Northumberland
NE22 6AX

T: (01670) 822984
M: (07703) 576951
E: steve@atebconsulting.co.uk
W: www.atebconsulting.co.uk