Over the past year, the FCA has increased its focus on conduct which is why it’s a good idea to investigate your own firm’s behaviour – before the FCA does it for you.
2019 began with the collapse of London Capital & Finance together with all the grizzly details that came with it. As the FCA’s investigations progressed, a picture emerged of a company in which misconduct was commonplace and went unchecked.
In response, the FCA said it planned to intervene more swiftly to protect the interests of investors and it has been true to its word. 2019 was a bumper year for fines, the biggest for four years hinting at a regulator which is becoming more confident and aggressive.
In particular, though, they have started to focus on the conduct and culture of a business because this, the FCA believes, is a prime indicator for which firms are more likely to experience compliance issues.
In a recent letter to the insurance sector, the FCA warned that firms would be at risk of failing SMCR if they failed to address financial misconduct. Jonathan Davidson, Executive Director of Supervision, Retail and Authorisations at the FCA, said the letter had come as a result of “recent, publicised incidents of non-financial misconduct in the wholesale general insurance sector”.
The same message was again hammered home in a recent speech at the Personal Finance Society by Debbie Gupta, the FCA’s Director of Life Insurance and Financial Advice.
“We expect you to adhere to your regulatory and professional duty, to give suitable advice to clients by identifying those conflicts of interest and managing it.”
Although many of the misconduct fines issued in the past year relate to historic abuses, the FCA still believes there is a culture of putting a firm’s financial interests above those of its clients. Firms are failing in their oversight and allowing a culture to develop where non-compliance becomes highly likely.
Take steps now
The FCA, then, will be grilling firms over their conduct, so it makes sense to beat them to the punch.
Ultimately, the FCA will be asking five questions of firms and you will need good answers for all of them. They are:
- 1. What proactive steps do you take as a firm to identify risks?
- 2. How do you encourage individuals who work in the front, middle and back-office to be responsible for managing the conduct of their business?
- 3. What support does the firm have to enable people to improve conduct within their area of the business?
- 4. How does the Board maintain oversight and consider the implications of each strategic decision?
- 5. Has the firm assessed whether any of their other activities could undermine their attempts to improve conduct?
Firms can start by identifying risks within their business. Those firms with higher degrees of permissions will require more extensive governance and oversight. Are people within the firm sufficiently competent to carry out their roles and are they given enough support?
Firms will need to maintain oversight and implement adequate controls to monitor conduct within their business. They will need to look at the strategic decisions senior managers will be making and what expectations are being placed on their employees.
Those who are too heavily incentivised for financial performance, rather than representing the interests of the customers, will be more likely to act against their best interests.
In other words, you should put yourself in the shoes of the FCA and start asking the questions they will. So, when they do come calling, you will have all the answers in place.