Judging the Judgements

Some firms will have already experienced FCA’s new supervisory process, as outlined in Chapter 11 Discussion Paper 09/2.
This foresaw a far greater level of involvement by FCA in firms’ decision-making processes, requiring FCA to question management’s commercial judgements, and then judging these by FCA’s own criteria.

Whilst the bulk of DP 09/2 was directed at investment banking, Chapter 13 made clear that this new supervisory process applies to all firms, irrespective of sector. Neither has FCA clarified whether it will only apply this new approach to firms which represent a systemic risk.

In the meantime, firms should prepare for an entirely different form of oversight. The precise form of this has yet to emerge, FCA only having stated their desire to conduct more “mystery shopping” and branch visits. Firms with retail exposure will know what to expect from these.

However all firms will need to ensure that the documentation of their key decisions and “judgements” is of a standard that will withstand initial “judgement” by the supervision team. Management will want to achieve this in a balanced way which meets the firm’s needs and which fits in with the firm’s existing processes. This is just as much an art as a science, and Fulcrum Compliance can assist in this process.

A Question of Competence

The competence of individual FCA regulated members of staff – and of directors of FCA firms – is becoming a bigger theme for FCA. As FCA moves ahead with its new supervisory process (see above), firms should expect FCA to be increasingly pro-active in calling into question staff competence.

Whilst this has always been likely in the aftermath of a market failure or rule breach, the new environment is likely to see FCA adopt a much more inquisitorial attitude to competence as part of normal running.

Firms in the retail arena have long been used to sophisticated training and competence systems, which allow them to show supervisors how their client-facing staff remain up-to-date with industry trends and the latest regulations.

FCA are now looking at this at the other end of the spectrum, inviting applicants for sensitive positions at major firms in for interview. Senior management at FCA have disclosed that for a number of applicants, this was not a happy experience.

For the bulk of firms in the middle, the key remains having sufficiently flexible appraisal systems that allow them to show FCA that staff remain competent, but do not impose unnecessary burdens on the firm.

Fulcrum Compliance has experience in designing appraisal systems that are appropriate and proportionate to the risks faced by the firm. We can call on the support of specialist Human Resources consultants to assist in this process.

Firms should not leave a review of these Training & Competence systems until the year-end – by then it may be too late!

Sanctions

FCA continues to stress the importance of its financial crime agenda.

Recent speeches continue to emphasise the increased risks and the need for continued vigilance in recessionary times – across all sectors and size of firms.

A by-product of this is FCA’s recent review (released in April) on the adherence by firms to the sanctions regime – the legislation which prohibits UK firms and individuals from doing business with certain individuals, entities or countries.

FCA believes that there is still widespread mis-understanding of this regime. For example, just because you “know your client” it doesn’t mean that you have complied correctly. Just because you don’t handle cash doesn’t mean you’re exempt from this regime.

FCA themed visits on this subject continue. Firms would we well advised to ensure their understanding of this regime ahead of such a visit.

Forceful Enforcement

The entire regulated community will have heard the increasingly load rattling of sabres emanating from FCA’s Enforcement Department. Gone are the days of “not being an enforcement led regulator”.

Now FCA is flexing its muscles and seeking criminal prosecutions in many more instances than previously.

All regulated staff should be aware of this trend. FCA’s determination to achieve “credible deterrence” means that it will seek maximum penalties in order to achieve the changes in behaviour it seeks.

Fulcrum Compliance can provide training sessions which consider the outcome of recent enforcement action, drawing applicable lessons for your firm.

Taking AIM

AIM Regulation continue to visit Sponsor firms to ensure that their procedures meet their expectations.

The precise role fulfilled by Qualified Executives and the nature of their relationship with their advised clients is an area of major importance to AIM. The recent £225,000 fine handed out by LSE to Blue Oar Securities shows that FCA are not the only supervisor acting tough.

Whether your firm is expecting a visit or has recently been asked to enhance its systems and controls as a result of such a visit, Fulcrum Compliance can assist in either pre-visit preparation or post visit rectification.

Retail restrictions?

At the time of writing, FCA had just published its intentions for reform of the retail market. Fulcrum Compliance will be advising its effected clients in the very near future.