When you next visit the windswept Canary Wharf you may well hear the FSA’s new battle cry “Credible Deterrence!” In its efforts to change the behaviour of market participants, the FSA is focusing its efforts on individuals and in particular Approved Persons. At the summer FSA Enforcement Law Conference, the Director described Enforcement as a tool “to bring about real changes in behaviour to protect consumers and to guard against abuse in the markets.” The Director also referred to “…a strategic decision to investigate more individuals” and “…more supervision and enforcement focus on individuals - especially Significant Influence Function (SIF) holders.”
The FSA believes that the message will hit home harder if the Approved Person rather than a regulated firm is faced with enforcement action. Of more significance is the regulator’s intention to consider and possibly to take action against a SIF holder based on their competency. Whereas in the past the FSA has been concerned with acts of misconduct and dishonesty by Approved Persons, it will now consider acts of incompetence.
The regulator’s hardened attitude to Approved Persons was demonstrated when it took enforcement action against Paul Briant, the CEO of Land of Leather. In fining Mr Briant £14,000 for a breach of Principle 7, the FSA remarked that a financial penalty was: “…required to strengthen the message to the market that it is imperative that chief executives and other senior managers who perform SIF exercise due care and diligence in performing their roles and take reasonable steps to ensure that the business for which they are responsible complies with the relevant requirements…”
At first glance, enforcement action against the CEO of a sofa retailer may not be of significant relevance to the regulated sector; however, the FSA’s comments on the delegation of authority and responsibility are applicable to all firms. Mr Briant’s Final Notice stated; “Whilst the FSA recognises that an approved person may delegate authority for dealing with a part of the business, he cannot delegate responsibility. Given that Mr Briant had chosen not to actively involve himself in PPI issues on a regular ongoing basis, he nonetheless needed to maintain an adequate understanding of the firm’s PPI business to effectively oversee the firm’s systems and controls.” In light of these comments, a review of a firm’s apportionment record may well pay dividends for an Approved Person.
A month after the Director’s speech the FSA fined PMSG Insurance Services Limited £35,000 for failing to ensure that the mortgage advice provided to its customers was suitable. The FSA also withdrew the approval of the firm’s compliance officer, Irene Hall, to perform controlled function CF8 (apportionment and oversight) because she lacked the competence and capability to ensure that PMSG was organised and resourced so that it complied with the regulatory requirements aimed at treating customers fairly.
The FSA Final Notice stated that: “…on her own admission, [Ms Hall] did not have sufficient knowledge of regulatory requirements or the competence and capability, to oversee PMSG’s regulated business, ensure compliance with regulatory requirements or exert influence over its adviser. As such she failed to comply with Statement of Principle 6.” Ms Hall also accepted: “…that she failed to recognise that the overall responsibility of ensuring proper compliance and administration of all systems and controls was a function that could not be delegated and that as the holder of the CF8 function she retained ultimate responsibility.”
The regulated sector would agree that an Approved Person who has demonstrated a lack of integrity or dishonesty deserves to be punished by the regulator, but is competency really a matter for FSA enforcement? Surely, it is an issue for supervision or, better still, the start of the process - authorisation.
Under the Fit and Proper Test for Approved Persons (FIT), the FSA determines an applicant’s competence and capability with reference to the individual’s training, expertise and experience. A later assessment of competence does not reflect well on the application of FIT.
While the Code of Practice for Approved Persons (APER) provides some guidance on what the FSA may consider incompetent behaviour, competency remains a very subjective issue. While no Approved Person or regulated firm would condone another’s act of misconduct or dishonesty, a lack of competence is not such a straightforward target for the regulator to take aim at.
FSA enforcement action for incompetence may be career limiting or, indeed, ending for the majority of Approved Persons, certainly those in a customer or compliance oversight function. In the face of such an adverse finding, an Approved Person may be more prepared to stand their ground and contest proceedings rather than follow the path of FSA executive settlement. If the regulator is serious about credible deterrence, then it should be prepared for more opposed investigations and contested hearings. The battle cry in reply from the regulated may well be: ‘come and have a go if you think you’re hard enough’.
With the competency of SIF holders on Enforcement’s radar, there seems even greater need for the industry-led solution to ensure that financial professionals consistently achieve high levels of competency. One method of ensuring competency is a requirement to achieve annual Continuing Professional Development (CPD). Other professions rely heavily on CPD to ensure professional competency. Failure to meet required CPD hours can result in disciplinary sanctions; it is not uncommon for legal and health professionals to be suspended for failing to meet CPD requirements.
The Financial Services professional associations would welcome a CPD scheme. In April, the Chartered Insurance Institute, Chartered Institute of Bankers in Scotland, Institute of Financial Planning and the Securities and Investment Institute (SII), 2008 published the Edinburgh Declaration (a joint Statement of Principles on Professionalism in Retail Financial Services).
The Edinburgh Declaration calls for the establishment of a single independent Professional Standards Board, created to oversee and develop professional standards to ensure consistency and high level standards, an agreed framework of CPD, practice certificates linked to the completion of CPD and a complaints handling/disciplinary system sitting alongside FSA enforcement action.
An industry-led solution would seem preferable, especially as the financial services industry knows its standards better than anyone, including the FSA. This greater role for professional associations is not necessarily a move to self-regulation but in line with the FSA’s view that market participants should police themselves. For some time now the regulators have been encouraging the securities industry to police themselves over market misconduct; there is no reason why the industry could not police itself over issues of competency.
While senior Approved Persons may draw more attention from the regulator at least they are well paid, or are they? Not any more, if the FSA has its way. Following unprecedented economic turmoil and the bail out of high street banks, the FSA’s Chief Executive, Hector Sants, circulated a “Dear CEO” letter on the issue of remuneration policies. Concerned that inappropriate remuneration schemes have given bankers incentives to pursue risky investment strategies, the FSA wishes to ensure that firms adopt and follow remuneration policies which are correctly aligned with prudent financial and risk management.
No doubt, thematic reviews and heightened supervision visits will follow on the heels of this Dear CEO letter. Firms, not just banks and investment firms, will need to justify remuneration policies and benchmark themselves against the criteria of good and bad practice outlined in the Dear CEO letter, to include the following.
Of course, a Dear CEO letter does not constitute FSA guidance but it is a sufficient shot across the bow of ‘HMS British Banking’ that most captains of the financial services industry will wish to review and, if necessary, amend existing policies. The industry may question whether such action by the regulator signals the end of ‘light touch’ regulation and whether it is the role of the FSA to influence how bankers and investment advisers are paid. Whereas the FSA may have many questions to answer about its role in the recent economic upheaval, it is clear that from now on the regulator will be more closely watching the regulated.