June Update 2013
As an independent body, the FCA does not receive any funding from the government. Therefore, to finance their work they charge a fee to each authorised firm, as well as some other bodies, such as recognised investment exchanges.
How is a firm’s fee calculated?
When deciding their fee, the FCA consider the type of regulated activities a firm undertakes, the scale of the undertaking and the costs that the FCA incur in regulating that firm. THE FIRM’ invoice covers fees FCA collect on behalf of the Financial Services Compensation Scheme (FSCS), the Financial Ombudsman Service (FOS) and Money Advice Service (MAS). By doing this, a firm can see in one invoice the total regulatory fees that the company is paying.
Where can I get more information about FCA fees?
The fees pages of the FCA website contain all the information you need including fee-block definitions, payments and examples of fee calculations.
Risks to customers from financial incentives
FCA have just carried out a review across a variety of authorised firms, large and small – that includes insurance firms and investment firms, which indicated that most firms are failing to adequately manage the risks of mis-selling arising from the way they incentivise their staff.
FCA are interested in all firms whose staff deal directly with customers and are paid based on the results. This includes whether or not they are paid a basic salary.
What is the expectation?
FCA expect firms to:
• Consider if the way staff are paid increases the risk of mis-selling and, if so, how.
• Review the way the way to control this risk and change where necessary.
It is recommended to take a look at the FCA’s guidance on this and consider what changes we may need to make to manage the risks in our firm.
The FCA does not expect firms to remove incentives, but they do expect firms to manage the risks created by them. Where risks cannot be adequately reduced, firms should change the way staff are paid. It expects firms to investigate recurring problems, take action and pay redress to consumers who have suffered harm.
Conflicts of interest
What is a firm’s responsibility?
Principle 8, of FCA’s Principles for Business state that a firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
What is a conflict of interest?
The following are examples of conflicts of interest:
• an insurance intermediary passing large amounts of business to a particular insurer because they previously worked at the insurer and still had friends there;
• a mortgage intermediary passes large amounts of business to a lender because they have a relative working at that lender; or
• a product provider may offer a loan and cash gift in the expectation of getting more business in return.
These are inducements or bribes.
What should a firm do to avoid conflicts of interest?
It is the senior management’s responsibility to set clear standards for their firm. Firms should identify potential conflicts of interest and how the firm should manage them, taking a broad view of the risks posed to your business. Responsibility for identifying conflicts and how to manage them should be clearly allocated to accountable individuals, and controls to reduce the impact of conflicts should be regularly reviewed.
You should have a formal conflicts of interest policy in place that clearly sets out how you propose to reduce any conflicts you identify. This should be regularly reviewed and supported by guidance for staff on how to recognise a potential issue and when to escalate it to management.
Do regulations require us to pass an exam?
Individuals working at regulated firms will only need to pass an appropriate examination if they are carrying out an activity that is shown in Training and Competence (TC) Appendix 4 and is subject to exam requirements. You may be pleased to note there are no exam requirements for giving basic advice to professional clients.
Which exams should I take?
This is up to individual firms – FCA’s rules (if an exam is necessary) simply require an appropriate examination to be passed. You can find their list of appropriate qualifications in Training and Competence (TC) Appendix 4
Smaller firms and the T&C requirements
Even small firms are still required to prove they have met FCA’s monitoring requirements. It is obviously difficult for you to monitor your own performance objectively; but you can do this by using a variety of training and assessment methods for developing competence, such as:
• attending and external course or conference from time to time; or
• product and market training.
Whistleblowing is when an employee raises a concern about a breach of regulation, an illegal act or dangerous activity that they become aware of through their work. Whistleblowing is relevant and applies to all organisations and people.
How does this affect a firm?
When a firm breaches regulation or commits a crime, the first people to have concerns are usually those who work at or with the organisation. FCA look to reduce the stress of whistleblowing and have a dedicated team that are set up to deal with and support those who share their concerns with them.
How does someone who wants to raise his or her concerns contact FCA?
In an ideal situation, individuals should always initially use the firm’s existing internal whistleblowing procedures to deal with their concerns. However, if there are no procedures in place, or they have been used without a satisfactory outcome, or it is not in an individual’s personal interest to use them, those working within financial services can:
-. telephone FCA to speak to a member of the dedicated whistleblowing team on their confidential telephone line, 020 7066 9200;
- email FCA at using their secure and confidential email address: email@example.com; or
- write to FCA at:
Intelligence Department (Ref PIDA)
The Financial Conduct Authority
25 The North Colonnade
London E14 5HS
For regulated firms it can be useful to think of due diligence from three distinct perspectives:
Your business model
• Conduct your own research on investment opportunities regularly to ensure you are considering relevant opportunities that fit into the scope of your service.
• Update your fact find to collect more information if you move into more complex deals.
• Have clear definitions of attitude to risk so the client is clear about what each means and how they relate to them.
• Don’t recommend or promote opportunities that you don’t fully understand.
• Ensure your teams regularly update each other on opportunities.
• Have appropriate management information in place for new or higher risk deals.
• Pay due regard to the interests of your client.
• Present all information in a way that is clear, fair and not misleading.
• Consider the amount of knowledge your client has, particularly regarding ‘sophisticated’ investment opportunities.
• Have you presented the potential downsides to your clients, as well as the potential benefits in a balanced manner?
• Ensure the client is clear why the particular opportunity is right for them and why it meets their objectives.
• Adequately research new opportunities to ensure they meet the client’s requirements.
• Ensure an adequate assessment of the client’s risk profile has been undertaken and opportunity matches this.
Implications for your business
Failure to put in place appropriate plans to assess and monitor higher risk investment opportunities could ultimately lead to serious implications for firms, including:
• Increased litigation risk
• Lack of client understanding
• Potential increase to PII costs
• Reputational risk
• Regulatory action
The FCA Asset Management Conference will take place on Monday 23 September at The Brewery, London, EC1Y 4SD. To register your interest in attending please email firstname.lastname@example.org
Finally, as mentioned in the last newsletter, don’t forget the Financial Crime Conference on the 1st July. The nature of the financial crime regime is changing significantly. Financial services firms are not only challenged by organised and innovative financial criminals, they also face increasing pressure from domestic and international regulators to have robust systems and controls to manage the risks posed by financial crime.
This is an opportunity for you to get an update on our strategy around financial crime and upcoming regulation and issues in combating financial crime.
Presentations on the day will be from some of the top speakers in the financial crime community as well as a discussion on the Fourth Money Laundering Directive proposal, future supervision and law enforcement.