Martin Wheatley, managing director of the Conduct Business Unit, and CEO in waiting of the Financial Conduct Authority, has made it quite clear that pre-emptive action is firmly on the regulatory agenda.
At the annual conference of the Association of Private Client Investment Managers and Stockbrokers last month Wheatley honed this message further, warning that client suitability must be at the forefront of wealth managers’ minds in the new regulatory order.
As it happens this is precisely what Ashcourt Rowan’s wholly-owned subsidiary Savoy Investment Management failed to ensure, a failing the FSA first became aware of during a thematic review, which prompted it to serve a Section 166 order.
Jonathan Polin, CEO of Aschourt Rowan, said: “The focus of the regulator on the wealth management sector is at an historic high, as this sector has not modernised with the same speed and vigour as other areas of the financial services industry.”
Tracey McDermott, director of enforcement and financial crime at the FSA, said: “Savoy failed to record and maintain enough client information to control the risk of unsuitable investment portfolios for its wealth management clients. From as early on as 2009, Savoy was aware of deficiencies in its client records but failed to take action, meaning these failings persisted for 22 months.”
On the rise
The conduct penalised by the FSA occurred before Polin joined the firm in August last year and while Savoy Investment Management is the first firm to be penalised for this type of indiscretion (with a £412,000 find), Polin said it was highly likely others will follow.
He is probably right. Just looking at the rise in the number of Section 166 orders handed out over the past few years gives a sense of how determined the FSA has become to penetrate the inner working is financial services firms.
In 2007/8 the FSA issued 29 demands for a section 166 report, a number that increased by 283% to 111 demands in 2011/12. The increase has been a steady trend too, with 56 orders made in 2008/9 and 95 in 2010/11.
The most unpopular aspect of a Section 166 demand is that the regulated firm itself has to front the cost. It must commission an external ‘skilled person’ to review the business and produce a report providing the FSA with information on the firms’ compliance.
Cost of compliance
Costs vary depending on the depth and breadth of the report required, with total costs to firms and individuals in 2011/12 mounting to £31.2m, according to the FSA’s Annual Report. Within this, costs per report ranged from £2,975 to £3m, the FSA said.
In the FSA’s Handbook it explains s166 reports can be used for:
- diagnostic purposes to identify, assess and measure risks;
- for monitoring purposes, to track the development of identified risks;
- in the context of preventative action; and
- for remedial action, to respond to risks when they have crystallised.
Iain Wright, partner at Advantage, a firm which conducts s166 reviews, said: “As the appointment of a third party to undertake a s166 review often indicates a strained relationship with the FSA it is advisable to appoint a firm that can steer you in the right direction, in terms of managing, and ideally repairing, that relationship to best effect.”
What to do if they come for you
He advises acting very quickly once the FSA has contacted you to inform you they require a s166 report, and to be aware of the fact it is unlikely the regulator will approve any third party you have previously worked with in an auditing function as they might have a conflict of interest.
In addition firms should make sure staff are aware they should not destroy any documentation and also engage with the FSA to determine the areas of concern and its thoughts on the scope of the review.
The FSA’s future hardline approach can be gleaned from McDermott’s closing comments: “Wealth management firms should be aware the FSA is now undertaking a further review which will include assessments of systems and controls.
“We expect firms to heed our warnings on standards within the wealth management sector and learn the lessons coming out of our enforcement actions. We will take robust action against firms and individuals where we find serious failings.”
Consider yourself warned.
