Month: December 2019

Check your Conduct Before the FCA Does - Waymark Tech Blog

Check your Conduct Before the FCA Does

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.

Monitoring conduct

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.

FCA Clamps Down on Mini Bonds- Waymark Tech Blog

FCA Clamps Down on Mini Bonds

The FCA is clamping down on mini bonds, but according to Andrew Bailey this is just the start.

Speaking to S&P Market Intelligence, Bailey said that the move should be seen as a sign of its growing assertiveness.

“Some of the most complex issues we deal with are things on the regulatory perimeters. Mini bonds are not within our regulatory perimeter, but the promotion of them can be,” he told S&P Global Market Intelligence.

On 26th November, the FCA said it was intervening to ban the mass marketing of mini bonds to anyone other than high net worth and sophisticated investors. The ban will remain in place for a year until they can think of an alternative permanent arrangement.

Mini bonds were integral to the £236 million collapse of London Capital & Finance which leaves almost 12,000 investors in danger of losing their savings. Because mini bonds are not usually covered by the financial compensation scheme, if things do go wrong, investors can be left exposed.

An independent investigation into the FCA’s handling at the behest of the Treasury is underway which has highlighted a number of shortcomings from the regulator.

The FCA has come in for extensive criticism from all quarters for a host of issues and is under pressure to up its game. This is a sign that it is willing to do this and to stray into areas which have not normally been under its sphere of its influence.

The problem was that FCA regulated London Capital & Finance but not the complex high risk investments themselves, which gave some investors a false sense of security. Because they saw London Capital & Finance was regulated, they naturally assumed that so were the investments, and that they would be covered by the financial compensation scheme.

London Capital & Finance, for the most part, were willing to allow that misconception to continue unchallenged. This grey area of regulation has now come under scrutiny, although the Government rejected a recommendation from the Treasury Select Committee to give the FCA more powers beyond its remit to expand the perimeter of what comes into regulation.

While some people believe the perimeter should remain where it is, Bailey argues this position is no longer tenable for most people. The idea that the FCA should not be responsible for enforcing regulation against some companies ‘is no longer sufficient.’

The ban is a year long temporary measure but the FCA plans to replace it with something more concrete. It’s a sign that they are willing to be more aggressive in their powers and expand the perimeter of what they plan to regulate.

The grey area will be squeezed and the regulator says it is working closely with Google to report those sites which are not following their guidelines. The message for companies selling unregulated products is that the loophole is closing. The FCA is pushing against its own perimeter and will expand its powers to the limit.

London Capital & Finance also contains a wider lesson for the financial world. Aside from the action from regulators, the public are less inclined to accept the difference between regulated and unregulated products. They will expect the same standard of clarity and responsibility across the entire spectrum.

FCA Plans to Share More Data - Waymark Tech Blog

FCA Plans to Share More Data

The FCA has admitted it could share more of its information to help the financial sector understand what bad conduct looks like.

Debbie Gupta, director of Life Insurance and Financial Advice at the FCA told the personal finance Society’s annual conference that the FCA sat in a unique position of being able to see, first hand, what bad conduct looked like.

“From our point of view, yes we are doing lots of work on rooting out bad practice, but I also think one of the things the regulator is privileged to see, in a slightly roundabout way, is what bad practice looks like.”

The FCA has chosen to take action on an advice market which it says is, too often, letting customers down. The area concerning the regulator most is defined benefits.

According to a survey from the regulator, advice in this sector is all too often ‘still not of an acceptable standard.’

The regulatory started out by asking advice firms with defined benefit transfer permissions to return data about their activities before following up with site visits. It quickly raised concerns when it found that 60% of firms providing transfer advice have recommended 75% or more of its clients to transfer.

It recently sent out letters to 1,600 companies about their advice surrounding transfers, more than half of the 2,500 advice firms working in the sector. The companies contacted have been given two months to make changes and get their houses in order.

Gupta says the regulator is seeing evidence every day where firms are failing to provide significant advice to clients. This data, can prove useful in creating a picture of what bad culture looks like.

The move feeds into their ongoing aim to reduce non compliance by improving general culture. As we’ve covered in the past it is already focusing on a company’s conduct as an indicator of potential non-compliance and it now appears to believe that this data can offer learnings to the wider sector about what bad culture looks like and how it can be avoided.

It’s a similar principle to the Enforcd Regulatory Database. By compiling details of enforcement actions taken across the financial sector it is possible to build a picture of where companies are going wrong and what they could have done to avoid problems in the first place. (If you would like more information on access to the Enforcd Regulatory Database please get in touch here.)

A look at the cases on the database shows common problems cropping up in terms of incentives, data management and governance. The FCA does indeed have a privileged position which can help to shine a light on the key warning signs of non-compliance.

However, it can also share details of good culture, giving firms a positive template on which to work. By doing so, it can give firms a guide including plenty of DOs, as well as the DON’Ts.

Control and Governance: Lessons from the Janus Henderson Fine - Waymark Tech Blog

Control and Governance: Lessons from the Janus Henderson Fine

The FCA has fined Henderson Investment Funds almost £2 million for unfairly charging customers active fees on two funds which were effectively tracking one another. It’s a case which demonstrates the importance of having effective control systems in place.

The Henderson fine relates to the treatment of customers before and after a strategy change which meant that two funds became closet trackers. The regulator said that 4,500 retail customers had been treated unfairly in two funds: Henderson Japan Enhanced Equity and Henderson North American Enhanced Equity.

In 2011, Henderson Investment Fund Limited’s investment manager, Henderson Global Investors Limited, reduced the level of active management on both the Japan and North American funds.

This should have meant they stopped charging their clients active fees, but their institutional and retail investors received very different treatment. While institutional clients were informed promptly, the company continued to charge retail investors active management fees.

Retail investors received no information either by the amendment of the prospectus or any other methods. For five long years, therefore, these retail investors were being charged the same active fees as their institutional counterparts.

In total, the FCA says retail investors were charged approximately £1.9 million more than if they had been in a passive fund.

“For retail clients, the Japan and North American funds were in effect operating as “closet trackers” as the fees charged to them were inappropriate given the diminished level of active management,” said the FCA executive director of enforcement and market oversight Mark, Steward. “The matter is aggravated by the length of time HIFL took to identify the harm being caused to the retail investors and to fix it.”

Henderson has accepted the financial penalty and has also informed and compensated all the affected customers. An HIFL spokesperson said: “Janus Henderson Investments accepts the FCA’s findings and the financial penalty and has co-operated fully throughout the process. Affected clients had already been separately contacted and fully compensated.”

Even so, the episode still has warnings over the management and governance of funds. The FCA stated that the case was exacerbated because it took so long for the issue to be rectified.

The regulator identified serious weaknesses in their systems and controls of oversight, governance and management. For this reason, it took years before they spotted the issue and resolved it. The company has taken steps but it will face questions about why one set of customers were informed but another was not, and why they failed to flag up the system.

Firms will have to update their controls and governance procedures to ensure issues such as these are identified as soon as possible. It is not just the initial issue of non compliance which creates problems for the FCA, but the lack of internal controls which ensured different customers received substantially different levels of service.

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