04Aug

For the first time since it became the main financial regulator in April 2013, the Financial Conduct Authority (FCA) has used its disciplinary powers to stop a firm from recruiting.

In July 2014, it was announced that the FCA had banned two subsidiaries of Cheltenham-based Financial Group – Financial Limited and Investments Limited – from recruiting new appointed representatives (ARs). The suspension lasts for four and a half months.

An AR firm does not hold an FCA authorisation, but is supervised by another firm which does, known as the ‘principal firm’. A principal firm with five or more ARs is classed as a network.

The failings identified were wide-ranging, encompassing recruitment, training, supervision, file reviews and risk management; and continued over a five-year period. Many of the products the ARs advised on were higher risk, such as unregulated collective investment schemes (UCIS), pension transfers and pension switches.

The issues uncovered by the FCA included:

  • No suitable risk management framework was in place
  • No standards for assessing the fitness & propriety of ARs at the recruitment stage
  • The recruitment process did not require applicants to provide a full CV, there was no structured interview process for assessing knowledge and skills, and references obtained were not sufficiently comprehensive
  • Insufficient identification of training & development needs of new ARs
  • Not carrying out sufficiently rigorous knowledge testing at induction courses, and allowing advisers to take these tests without supervision
  • Allowing advisers to commence giving advice without attending an induction
  • Confusion as to what was the exact procedure for declaring an adviser as competent
  • Inadequate knowledge testing and no formal training for field-based compliance supervisors
  • File reviews not being carried out to a consistent standard
  • Files for high-risk products not being reviewed until after the sale had been completed
  • Allowing ARs to use their own fact finds, research tools and other documentation, without the principal firm’s approval

Above all, the FCA said that the firms treated their ARs as the end customers, rather than the clients they were servicing.

The FCA had intended to fine the firms £13.2 million, but refrained from doing so after evidence was produced of their adverse financial situation.

The FCA has also ordered the Group to conduct a historic review of its pension switch and UCIS business, and to pay compensation to affected clients.

The FCA said of the current situation at the Group that it: “recognises that the Group now has a new and more experienced Board in place which has engaged with the FCA and an external consultant to effect material changes.”

Tracey McDermott, the FCA’s director of Enforcement and Financial crime, said of Financial Group’s punishment: “The sanction is intended to send a message of deterrence to the rest of the industry, and serve as a reminder that the FCA takes systems and controls failings very seriously and is able to respond with sanctions that target the specific revenue streams of different types of business.”

All firms with ARs, or who are considering taking them on, should read this judgment and ensure that the same failings cannot be laid at their door.