In late June 2015, the Financial Conduct Authority (FCA) published two Warning Notices on its website regarding the alleged activities of two directors of investment advice firms.
The regulator sometimes publishes Warning Notices when it commences an investigation into an individual or a firm, although it is not usual for the individual or firm to be named on these Notices. The FCA’s Regulatory Decisions Committee considers representations made by the individual or firm in response to the Notice, and enforcement action may follow as a result of the FCA’s investigations.
On the first notice, the individual is alleged to have:
• Failed to monitor the firm’s advisers sufficiently, giving rise to an increased risk of unsuitable advice
• Not implemented sufficiently rigorous controls regarding the advisers’ activities
• Not developed a business model that addressed previous advice failures
The alleged failings of the second individual are:
• Not reviewing and scrutinising the firm’s risk controls sufficiently
• Not implementing measures that would have allowed the firm to control risks – partly due to the lack of a review referred to in the first point, and partly because the individual lacked understanding of the relevant risks
• Not putting a system in place to assess the effectiveness of the firm’s risk controls
In general, the two Notices allege that the individuals have failed to act with due skill, care and diligence, which is a breach of Principle 6 of the FCA’s Statements of Principle for Approved Persons. Client detriment may have resulted as a consequence.
All advisory firms need to have rigorous procedures in place to monitor the activities of their advisers. Advisers should be subject to a system of file reviews, conducted by the compliance function, a compliance consultant or another competent person, under which the advisers and products deemed to present the highest risk receive the highest level of monitoring. Records of each adviser’s file review scores thus need to be maintained, showing which products the various grades awarded apply to.
The usual grading system for a financial adviser’s file would be to award one of the following grades to each file: Unsuitable, Unclear, Pass with remedial action and Pass. If the grade is Unsuitable, then steps should be taken to stop the sale proceeding, or where this is not possible, to pay compensation to the client. If the file has been graded Unclear (there is insufficient information to show whether suitable advice has been given) or Pass with remedial action (the advice is suitable but amendments are required to certain areas of the file), then the firm needs to ensure that the necessary remedial actions are carried out.
To reduce the risk of giving unsuitable advice, firms should consider conducting file reviews before the applications have been submitted to the provider, especially for higher risk products such as pension transfers, drawdowns and complex investments.
Firms should also keep a close eye on an adviser’s statistics regarding: product mix, provider mix, persistency, rule breaches, complaints received and complaints upheld. Firms must also ensure advisers complete sufficient Continuing Professional Development each year, and that advisers’ development and training needs are identified and addressed.
All firms also need to consider the various risks that could affect them. Each potential adverse event should be graded according to both the likelihood of the event occurring, and the level of impact it would have were the event to occur. By combining these two scores, firms can work out which are their largest risks. But for all risks, large and small, firms’ directors and senior management need to consider what steps can be taken to reduce and/or eliminate the risk.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.