The FCA welcomes the statement by Royal Bank of Scotland, given at today’s Treasury Committee hearing, that they will not object to the FCA publishing the s166 report into the treatment of small and medium-sized enterprise customers transferred to its Global Restructuring Group. On this basis, we are content to publish the s166 report. To do so will also require the consent of those who provided the information in the report and any individuals who are identified.
Tag Archive for s166
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.
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.
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”.
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.
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Compliance Consultant: Although Origen have set aside £204,000 for this S166, that is probably only the consultancy fee being charged by the Skilled Person. The actual costs will likely be 3 or 4 times that as the management time, senior management reports/briefings, ongoing impact analysis of the audit and action plans will eat into the resource budget like a hungry caterpillar. So the overall cost, excluding any regulatory fine or censure (risk mitigation plan) is likely to be nearer £1m.
All this could be avoided if regular, independent compliance risk audits were conducted and firms stopped choking on the exhaust from their own departments which get watered down and “revised” to help the responsible persons seem to be doing a good job.
Advice group Origen Financial Services faces a costly Financial Conduct Authority (FCA) investigation into its pension transfer advice.
The FCA informed the Aegon-owned company in January that it would be appointing a skilled person to review the fund recommendation made by Origen advisers to”a number” of defined benefit scheme transferees, according to its 2014 accounts published this month.
Origen has set aside £204,000 to cover the cost of the review, known as a Section 166 (s166).
But it admitted that the scope of the work, which will focus on enhanced transfer value recommendations, has yet to be finalised meaning this figure could rise.
The skilled person review follows an industry-wide investigation by the FCA into enhanced transfer value (ETV) exercises, the practice of companies making offers to members of their pension schemes to encourage them to leave the scheme, lowering the companies' future liabilities.
The review, published last July, found that out of 300 cases a third of the advice was unsuitable.
Origen said its directors do not anticipate any redress costs as a result of the review, though admits it is not possible to predict prior to the s166 being completed.
It made a provision of £602,000 in 2014 to cover the costs of dealing with claims against it related to advice. That followed a £747,000 provision the previous year.
Origen reported a pre-tax loss of £1.13m, an improvement on the £5.6m loss it made in 2013.
The FCA was granted new powers to issue s166s in 2013.
Prior to then, advisory firms were not often issued with s166s. The reports – which are effectively third-party spot checks on particular areas of a business – were typically only required of larger firms, such as banks.
Now the FCA can appoint a skilled person directly, effectively giving it total control over the process.
The regulator told Professional Adviser back in 2013 that it would be unusual for an advisory business to receive a s166 review, but that it didn't rule it out.
“[The reviews] do not exclude any particular category of regulated firm, because there may be a circumstance in which they could be useful,” it said.
The FCA commissioned 44 s166s across the industry in 2014, though only one firm was referred to enforcement as a result, leading a law firm to question their effectiveness.
Adviser firm struck off for failing to conduct skilled persons report … – The FSA says the London-based investment adviser failed to be “open and honest” in its dealings with the regulator.
UK Regulator to consider how commercial borrowers are treated … – The Financial Conduct Authority (FCA) has appointed Promontory Financial Group and Mazars to conduct an independent skilled persons report under section 166 of the Financial Services and Markets Act (FSMA) 2000.
SoundSmart – Update on independent review of RBS's treatment of … – The Financial Conduct Authority (FCA) has appointed Promontory Financial Group and Mazars to conduct an independent skilled persons report under section 166 of the Financial Services and Markets Act (FSMA) 2000.
Lee Werrell and Nick Hawke presented a talk at the BBA on 17th January 2013 on “How to Respond to a S166”. The talk was attended by numerous heads of departments, legal counsel and compliance staff from major banking and asset management organisations as well as other consultants.
Using this and other talks we have compiled a Frequently Asked Questions (FAQs) list which is available at this link
Wealth Managers Ashcourt Rowan has reported a £1.2m loss before tax for the six months to 30 September 2012, due in part to a £412,000 fine from the Financial Services Authority relating to group company Savoy Investment Management.
Kenneth West, chairman of Ashcourt Rowan’s board, said in his statement within the company’s results that Savoy had been served with a ‘section 166’ order “just a few days” into his reign last year as part of the regulator’s thematic review of investment suitability. The fine represents the outcome of that skilled person’s review, he added.
Savoy were cited by the FSA as having failed to take adequate precautions to control the risk of selling unsuitable investment portfolios.
CEI Compliance have been warning retail advisory firms that the FSA have been planning a Nationwide Suitability Review and now was the time to get their houses in order. “Wealth Management and IFA firms will likely be caught by these themed review that will be taking place across the company.” Lee Werrell, owner of CEI Compliance has said. “Many more will have to pay substantial fines as the FSA completes its thematic review” He added.
Talking about suitability generally, Lee Werrell said that “Standards are increasing across the retail advice landscape, but it hasn’t been taking place fast enough for the regulators. They want to make sure that not only the transition to RDR is completed successfully before their watch is over, but also that they have bench-marked and raised the bar on the level of recorded advice and ultimately, suitability.”
A S166 Skilled Person’s report can be ordered by the FSA and paid for by the firm, and this is in addition to any fine that may be imposed. for a free copy of the Senior Management Guide to S166 – please go here
Difficult economic times don’t stop this consultancy firm
Edinburgh, August 2011 — With rumblings of doom and gloom in the business world, CEI Compliance Limited (http://www.cei-compliance-limited.co.uk) is a breath of fresh air. The South Coast based firm is intent on investing time and effort into business development in Scotland over the next year.
Founder Lee Werrell hopes that other financial services firms will follow in its footsteps. It’s a tough act to follow. In the last two years alone, CEI Compliance has completed many projects from online retailers through to FTSE 100 companies.
“Scotland was built by entrepreneurs,” said Werrell, “and our financial service companies have all but turned their backs on Scotland in their time of need. CEI Compliance Limited will strive to achieve its goal of a £2 million capital infusion into the economy.”
An entrepreneur at heart, Werrell speaks from experience. He has owned and operated many companies over the years. “I understand the clients’ perspective and where they are coming from,” he says.
Werrell says CEI Compliance is aggressively looking for investment houses, banks and insurers with regulatory projects – in the Middle East, EU and UK – focussing on compliance and risk, but also assisting in Strategy Planning and other elements of financial inclusion. Werrell explains: “We utilise a broad range of specialists as wella s generalists, who often white label for the bigger consultancies. Our secret is that we offer specific additional value at a fraction of the price.”
“Our goal is to form partnerships where both parties benefit,” continues Werrell. “We want to build long-lasting relationships with reducing dependency, with our clients. Another important goal for us is to build our philanthropic work. We are pledging 5 percent of yearly profits to charities such as “Help For Heroes”.
A former serviceman himself, Werrell appreciates the sacrifice that servicemen and women make for their country on a daily basis. He always insists that the poppies he buys each year are not for the dead, but for those still living with the hell inside their own memories. His business is driven by principles as well. “CEI Compliance Limited was founded on integrity, honesty and fairness. That is the basis of every project we undertake, and it guides us on a daily basis, both in our business and our other aspects of our lives.”
About CEI Compliance Limited
CEI Compliance Limited, is the leading alternative regulatory compliance consultancy. Leveraging on specialist from all disciplines of regulatory compliance and risk, CEI can supply the right people at the righ time. CEI Compliance Limited is a member of the Association Of Professional Compliance Consultants(APCC) which is the only compliance trade body recognised as such by the Financial Services Authority