Tag Archive for compliance monitoring

S166 uncovered: Why £4m was added to advisers' FSCS bill – A Salient Tale

A stockbroker failed leaving a thousand unresolved claims to the Financial Services Compensation Scheme worth upwards of £4m. Professional Adviser reveals the findings of a regulator-ordered skilled person review into what went wrong… 

Resources Global Professionals (RGP) was instructed to carry out a skilled persons review of City Equities by the Financial Conduct Authority (FCA) under section 166 (s166) of the Financial Services and Markets Act 2000.

It carried out the review during July and August 2013 – just two months before City Equities entered administration and was placed in default by the FSCS.

The findings detailed below are from a copy of the draft report RGP compiled of its s166 review, which according to the report cost £32,289. 

Directors asleep at the wheel

The report's appraisal of the firm's directors is scathing – that they simply didn't understand their regulatory responsibilities while in charge of a firm investing millions of people's money.

“The firm's senior management oversight and risk control is reactive to events and is inadequately resourced and the current senior management, individuals holding CF1, either do not have the competence or experience to undertake their role or in the case of one director is not involved with the business on a day to day level,” the report stated.

The firm's two directors admitted they were”not competent” in the senior management systems and controls (SYSC) rules, knowledge of the FCA principles, the code of conduct for approved persons or knowledge and understanding of the financial resources rules, according to the draft report's findings.

It is unclear whether further versions of the report were ever produced.

You're hired!

Not only did the directors not know what they were doing in dealing with compliance, nobody else at the firm had a clear idea of what they needed to do either, according to the report, as it had no up to date job descriptions against which to assess the competence of new directors, senior managers or key roles to which the firm was seeking to recruit.

Compliance chaos

According to the report, City Equities' senior management staff and organisation chart showed Joe Egerton, CEO of his own firm Ignacity, as head of compliance.

But the report stated that there was no contract of employment or contract for services between the firm and Joe Egerton personally.

The firm had submitted to the FCA to register Egerton's firm Ignacity as compliance officer, money laundering reporting officer and CASS oversight officer, with Egerton supposedly fulfilling those roles, it said.

But as the report points out, SYSC rules and ESMA guidance indicate that an”individual natural person” should be appointed to oversee compliance.

City Equities failed to demonstrate”why it believes a corporate entity can hold the roles” of compliance officer, money laundering reporting officer and CASS oversight officer.

In any case, the report found significant reliance was placed by the directors on regulatory and compliance advice provided by Egerton.

However “no evidence was provided to demonstrate that the firm had carried out any fit and proper checks or competence assessment on either Ignacity Ltd, its directors or on Joe Egerton”, the draft report stated.

A damning assessment of City Equities' compliance failings dominate the report, in which Egerton gets his own section.

Egerton was not registered by the firm with the FCA as compliance officer at the time of the skilled persons' review, according to the report.

A draft contract between Ignacity and City Equities was only dated 10 July 2013, the report said. Egerton states on his Linkedin profile he had been head of compliance at”a small City stockbroker” firm since August 2012.

No other evidence of any formal contract for services between Ignacity and City Equities was found, according to the report.

The report also found”no evidence that there is any recent or up to date risk assessment or compliance risk assessment of the firm”, or even a risk assessment or compliance document.

Also absent was a work plan to address risks identified in a risk assessment or to carry out a proactive investigation, or to anticipate and resolve potential compliance issues or problems arising from the sale of the business in 2011-2012, or the dramatic decline in the firm's business.

“The compliance function appears to be reactive to events only,” the draft report said.

The firm's compliance manual included reference to a financial promotions process but the manual was described as”very brief and significantly out of date”.

Overall the detail provided on financial promotions was”inadequate in setting out robust and clear control processes given the activities of the firm”, the report said.

The skilled persons review also found there was”no clear evidence that the compliance department has reported on key monitoring, risk and activity areas to the directors in a formalised or structured manner”.

“There was a lack of formal compliance management information that is escalated to the board,” the report said.

The last internal monitoring report on suitability that the skilled person's review could find in August 2013 was dated July 2012.

This report evidenced that a number of calls were assessed and that the monitoring highlighted a number of issues such as concerns and risks with adherence to front office sales procedures where clients are being advised to sell a share, regulatory errors, breach of sales processes and the need for know-your-client updates or identified know-your-client shortcomings.

There was no evidence, however, as to how the outcomes of this report were progressed and what monitoring, if any, was undertaken on suitability in the period since July 2012, according to the report.

Egerton claimed that a new compliance programme had not yet been able to be implemented – but the skilled person's review found no specific evidence of what this new programme had intended to entail.

“The position with the firm using an external compliance consultant has also not appeared to have delivered the required outcomes and controls,” the report said.

By not having a”competent” person in the roles of compliance officer, money laundering reporting officer and CASS oversight officer, City Equities was in breach of FCA rules, it concluded.

Professional Adviser contacted Egerton and put the issues raised in the draft report to him.

He claimed that except between October and December 2012 he was”only a consultant whose advice was regularly ignored” by City Equities, despite stating on his Linkedin profile that he was”from August 2012 to August 2013 acting head of compliance for a small City stockbroker”.

The draft report was”factually wrong” on”a number of points”, he said, but declined opportunities to explain how, or provide evidence.

He said the report's authors”had not been given documents and information that they should have been by another person who had that responsibility” that would show his compliance practices.

“The problem with the firm was not that it was not being told what it needed but that it rejected advice,” he said, adding that the report is”inaccurate”.

Ownership woes

The firm's main owner admitted he had no detailed knowledge or understanding of FCA Principles or key FCA rules. He relied on the directors and on Egerton for guidance on these matters, the report said.

The owners also had”very little understanding” of the UK regulatory regime and its requirements and”in the lack of competent guidance” have been unaware of the impact of some of the actions they have taken, the report said.

Quality of advice

Despite all of the above, the skilled person's review found that the standards of client advice based on the sample undertaken were”generally suitable or appropriate”.

However, some 1,000 people have taken claims to the Financial Services Compensation Scheme – at a total value of some £4m.

The skilled person review found no unsuitable cases in its review sample, but of the 45 cases reviewed nine were deemed unclear and at least one of these cases was highlighted as potentially unsuitable.

“There was evidence from the firm's complaints records and internal monitoring in 2012 to suggest that a wider review of suitability for an earlier period might identify wider legacy issues,” the report said, adding that such a wider review was outside the scope of its investigation and report.

Summary

If you want to have your compliance division or department independently reviewed, please contact us on 0207 097 1434 or email info@complianceconsultant.org

Our Best-Selling Compliance Manual Template is available HERE 

Our Governance Packages are available HERE

Source: http://www.professionaladviser.com/professional-adviser/feature/2433399/s166-uncovered-why-gbp4m-was-added-to-advisers-fscs-bill

LinkedIn Auto Publish Powered By : XYZScripts.com