FSA Lawyer - Blog

The decision of the Upper Tribunal in Pottage v FSA in April 2012 concerned the regulatory responsibilities of a Chief Executive, being CF3. Clearly this will also be of interest to all of you who fulfill the CF1 director, CF4 partner, CF10 compliance oversight and CF11 money laundering reporting functions within any authorised firm.

Under APER Principle 7 a SIF must take:

"reasonable steps to ensure that the business of the firm for which he is responsible in his controlled function complies with the relevant requirements and standards of the regulatory system".

FSA interpreted this duty as requiring Mr Pottage, on taking up his position as Chief Executive, to perform an "Initial Assessment" that gave him an accurate and thorough understanding of six aspects of the firm and its business being

• The state of the business, including the design, operational effectiveness and strengths and weaknesses of the governance and risk management frameworks.
• The operational risks of the business and the current systems of control.
• The quality of management information available to assist in the assessment of whether the governance and risk management frameworks of the business were operating effectively.
• Significant risks or compliance issues that had occurred during Mr Pottage's predecessor's tenure.
• The practical implications of the global matrix management structure.
• The strengths and weaknesses of the individuals who reported to him.

Despite the Code of Practice on compliance with the APER Principles making no mention of a duty to conduct an Initial Assessment the Upper Tribunal accepted the FSA's broad interpretation of APER Principle 7 to impose on a SIF the requirement to conduct a detailed Initial Assessment when taking up the role, as well as continuous monitoring duties.

However, the Upper Tribunal also made the following observations concerning the regulatory duties of a Chief Executive:

"(1) Where a control failure in a business becomes apparent, the CEO from his unique position of oversight can be expected to assess the wider implications of that failure to the business as a whole.

(2) The CEO as an approved person will be the subject of disciplinary action on account of a breach of a Statement of Principle where he is personally culpable, but not otherwise. (3) A CEO is not required to design, create or implement controls personally: his is a role of oversight.

(4) There is not an obligation on the CEO to do the job of an appropriately appointed delegate of his.

(5) An approved person is not required "to ensure" that the business has compliant systems and controls. The obligation on him is to "take reasonable care to ensure" that the business has compliant systems and controls. What is required to be done by way of "reasonable steps" depends on all the circumstances".

Given the propensity of the FSA ever to seek to expand the responsibilities and hence liabilities of approved persons it is perhaps not unreasonable to expect FSA to seek to extend this implied duty of carrying out an initial assessment to any person taking up a role of CF1, CF4, CF10 and CF11.

Such implied duty would clearly have its difficulties for those, other than an incoming CF 4 Chief Executive, whose new position may not have the seniority within the organisation sufficient to impose the changes that he or she may feel necessary that a Chief Executive would have greater freedom to implement.

Subsequent supervision reviews by FSA may not always be able to identify the point at which failures in Systems and Control or systemic breaches of specific rules commenced and there may therefore be a risk that an incoming CF1, CF4 , CF10 or CF11 may over time acquire responsibility for antecedent breaches.

It would therefore appear to be a statement of the obvious that when any incoming CF1, CF4 , CF10 or CF11 takes up a new role that he/she immediately carry out an initial assessment of the practices, procedures and failings within the role prior to his/her appointment and that they be documented. Having identified them, however, the CF1, CF4 , CF10 or CF11 would thereafter be under a duty to seek to rectify them but, if frustrated by more senior management, then culpability may be argued to rise to the top.

As with all else in the regulatory regime, if it isn't written down then it didn't happen – that goes for your personal regulatory responsibilities as well as the firm's.

That the policy of current regulation is based on pure economic theory, behavioural scientific theory and game planning, and whether or not these concepts are right or wrong, are in practical terms for IFAs out in the real world not immediately relevant.

IFAs have to deal with the realpolitik of a system as is created by those in power to satisfy the demands, rather perhaps than the needs, of those who put them there.

IFAs have a choice – to reject that system and all of its iniquities and leave the sector altogether, or to embrace it and to engage with FSA on their own terms and not on the FSA's terms.

And that's what I do. I engage with FSA, on frequent occasion with brass knuckles and steel toe caps, so any contribution I can make is from that perspective.

So often the IFAs' files I read, and I have read very many from many IFAs, are deficient in form rather than substance.

In defence of the FSA – and those are words you will not see from my pen very often! – any regulatory system has in large part to be evidence based. You cannot make a system purely outcomes-based due to the inherent danger of encouraging an "end justifies the means" style of client advice. And evidence based regulation inevitably encourages, at least in part, a tick-box approach. We all know that.

So it never fails to surprise me that, even after almost 25 years of escalating regulation, IFAs still get this and so much else wrong. And given that so many employ compliance consultants that should not be. But it is.

The simplest example – there is no statutory or regulatory requirement to have a document called a "fact-find" so technically if you don't have one for each client you have not breached any rule. But the reality is that FSA expect to see one, in a form that is simple to read, contains all sort of hard and soft facts, has some firm of risk profile and, best of all, is signed by the client. If you don't have this then you run the risk of FSA accusing you of not having sufficient KYC – and that is absolutely fundamental to what you do and to all FSA regulatory action.

Likewise the FOS look for it – if you don't have it, even tho you are not required by the rules to have it, you can almost hear the complaint go "slam-dunk".

What seriously shocks me is not just the lack of common sense to make sure the paperwork looks to be in order, but the level of ignorance of some IFAs of the existence of rules that are relevant to what they actually do let alone understanding what the rules require.

The IFA owes it to himself, quite apart from his client, to have at least some passing knowledge with the rules – at the very least he should know that there IS a rule that covers what he is doing!.

I asked one IFA, whose promotion of UCIS was being investigated, to explain the fundamental S.238 restriction on promoting UCIS – his "What do you mean?" response left even me speechless.

This was the guy who, to my stunned disbelief, continued to advise clients on UCIS after he had varied his permission to exclude UCIS and even completed UCIS apps in the trading name of a sole trader IFA who had died 10 months previously.

I regret to say that in my experience ignorance of the rules and lack of common sense, perhaps not quite to the depths mentioned above, are not unknown.

The dual triggers to any enforcement action by FSA or complaint to FOS alike are performance and how that impacts on the investor. If enough clients are adversely affected, or if enough complain, FSA undertakes a thematic or similar review and the circus rolls on.

From a regulatory defence perspective, however, I could say that the investment outcome to the client is almost irrelevant provided the IFA's file documentation is in order. If your file contains the hard evidence of your undertaking research, of what you researched, what use you made of it, of what you advised clients and how you advised it and is in a form that aids the tick-box approach of the FSA, and if you take the time to read and at least to be able to demonstrate a knowledge of the rules (an understanding would also assist) then when it comes to the supervision visit you have given yourself a fighting chance.

I am currently working with a number of IFAs who have exposure to UCIS regulatory risk and/or who have received S.165 requisitions from the FSA's Arch Cru review team. I know that these firms are all likely to be targeted by FSA at some point so my advice to them, and to any reading this, is to use the time between now and whenever FSA come knocking to prepare for that.

FSA are currently undertaking a review of the sale of Arch cru. Whatever the cause of the suspension of EEA it is almost a racing certainty that FSA/FCA will undertake a review of the sale of this investment as well – if only as a self exculpatory exercise.

Inevitably, in the course of such reviews some IFAs will fall foul of the FSA/FCA picking up other issues and taking regulatory action in that regard.

Any IFA who advised clients into Arch Cru or EEA has an opportunity not only to prepare for such review but also plan for the possible financial impact on you personally of the regulatory action that could follow.

It will happen.

As I am not a financial adviser, of any category, I amn't qualified to make a comment on the pros and cons of cash flow modeling in the financial planning/advice process.

However, as a financial services lawyer advising IFAs in FSA supervision reviews and defending IFAs in investigations, I would offer some advice. If you do use such modeling in the process of planning with and advising your clients, please do be very careful to ensure that you retain copies of every scenario you model.

In too many cases I deal with the adviser simply flips through the model changing assumptions to show the effect of all sorts of disaster what-ifs but so often fails to keep a copy.

What the adviser will most often retain, and may well insert into his suitability report to the client, is a copy of the base cash/capital flow model which may well show the optimum flow – which then opens the adviser up to the charge by the FSA that the advice has been overly optimistic.

I therefore advise my IFA clients that if they do use cash/capital flow modeling that they ensure, slow though it may be, that when running cash flow models for the client onscreen to print each to pdf and save to the clients. That may well curb the tendency to flash dozens of scenarios at the client which, in some cases I have seen, would have been no bad thing.

You might also ensure that your reports to the clients do include some of the disaster scenarios alongside the optimum.

The FSA's supervisions and investigations are, and the FCA's will apparently be, evidence based as to point of sale compliance and not outcome based. If you do not have evidence of what you say you did then you didn't do it.

This article looks at the case of a group of investors who all have SIPPs, possibly from the same provider, and all of which have lost money in the same UCIS funds.

The first think I should day is that in my experience there are very few experts in the area of UCIS, and I include the FSA in that, or in the handling of complaints on the scale that a group of similar investors may have to consider. For myself, I do not hold myself out to be an "expert" in either as I have learned enough to know that I will never know enough.

I am a financial services lawyer and have considerable experience in relation to unregulated collective investment schemes (UCIS) and also in both pursuing and defending clients' complaints.

Re UCIS – I have acted for and presently act for 6 IFA firms around the UK in FSA supervision reviews and investigations of the firms' promotion of UCIS to retail clients. So I am very familiar with Section 238 of the Financial Services and Markets Act 2000 that prohibits the promotion of UCIS to retail clients unless one or more of a number of exemptions apply.

There are two criteria that an IFA firm must satisfy to give "suitable" advice to a retail client to invest in an UCIS:- (1) was the client eligible to receive the promotion of a UCIS and did the firm follow the correct procedure in assessing whether the client was so eligible, and (2) having established that the client is eligible, is the UCIS recommended actually suitable to the client.

The process of assessing eligibility is time consuming and it has to be documented. If it isn't documented then it did not happen. Further, the process has to follow a defined order of steps. If it did not follow those steps in the correct order then it may be in breach of the rules.

Suitability, on the other hand, is determined by reference to various factors including, in no particular order, the risk profile of the UCIS matching the client's attitude to risk which may be gauged by the type of investment previously held; what were the client's investment aims and objectives; what was the client's level of knowledge and experience; what was the client's investment time scale.

UCIS are generally not covered by the Financial Ombudsman Service (FOS) and/or the Financial Services Compensation Scheme compensation schemes if the funds fail – but the process by which the IFA advised an investor into the scheme is covered.

If a group of investors in the same failed UCIS fund were to make complaints to their respective IFAs and if they all rejected the complaints, as I suspect they would, then they would all individually have to complain to the FOS. The FOS would have to assess each individual case to determine if the two criteria had been satisfied to establish if (a) each investor were eligible, and (b) if the advice given to the investors respectively was suitable.

It may be suggested that it could be difficult to persuade FOS to uphold complaints about a miss-sold UCIS because the risk profile matched the investor's ATR but if an investor was not eligible to receive the promotion of a UCIS by the IFA then that promotion and sale was unlawful by reason of being in breach of Section 238. My argument to the FOS would be that whatever power Parliament intended the FOS to have and to exercise, and it has a very wide discretion in deciding complaints, Parliament did not intend that FOS' decisions should in effect sanction an unlawful act whether or not the risk profile and ATR matched.

Where there is a large group of investors there will be a considerable commonality of circumstances. All of the IFAs will have had to follow the same procedure established by the UCIS provider. It may be that many of the investors in the group had/have the same IFA – in that case I would bet my bottom dollar that if he/she has made a fundamental error in one case either in relation to assessing a client's eligibility to receive a promotion of UCIS or the suitability of the UCIS then they will have replicated that error in all.

It would be advisable for you all investors to get together and to pursue complaints against the IFAs simultaneously and, when all of these are rejected as I think they would be given what is at stake, then they should all submit your individual complaints to the FOS simultaneously.

With a large group of investors in total that will not be easy but is do-able if you all instruct the one representative who knows his/her way round the system.

I can say that with some confidence because I am currently running and managing a "class action" group of 147 complaints against London Capital Group (LCG) in respect of a foreign exchange trading program. This has been the subject of online articles in the past so you will be able to research that. Admittedly, all of these complaints is against one respondent whereas in other cases there may be a multiplicity of different IFAs although some investors may use the same IFA.

In that group complaint against LCG the subject of dual complaints came up in discussion between me and the FOS. It appeared to have been the view of the FOS adjudicators dealing with the complaints against LCG that a client could complaint against LCG for the management of the investment account, which is what the complaints are based on, or against the IFA for unsuitable advice – the FOS appeared to be then of the view that it was one or the other. After some discussion, they appeared to accept my argument that a client could make two complaints simultaneously – one against LCG on the grounds of the management of the investment account, and the other against the FIA for bad advice. To my certain knowledge a number of clients elected to do just that.

I have also taken instructions to act for a smaller group of 26 in complaints against a stockbroker in relation to contract for difference trading. That firm has since gone into liquidation.

So it is with some confidence that I say that I think you could make a complaint against the IFA and simultaneously consider a complaint against your SIPP provider for failing to exercise due diligence in selecting and accepting a fund that structurally was inherently too high risk or badly managed. They would be on very different grounds. If you won compensation in one case then that would have to be taken into account in the other.

It is possible that some IFAs may find the burden of such claims too great to bear and may go under. If they do they may then be deemed by the Financial Services Compensation Scheme to be "in default". The FSCS will not entertain a claim form investors in respect of a bankrupt IFA's advice – remember the UCIS itself is not covered by the FSCS compensation rules - where you have another avenue of seeking compensation.

If all complaints against the IFAs and against the SIPP providers are handled and managed together then the investors will add power to their elbows.

Based on a blog comment in Citywire 20.09.11

Avoiding complaints is as much to do with managing the client and their expectations before during and after the advice process as it is to do with ensuring the suitability of advice in the first place, but once a complaint has been made then its outcome may be influenced by how you deal with it.

A complaint is a complaint is a complaint whether it is informal or "full blown" and whether it is about you, your advice, the product or its performance and whether it is made verbally or by email or in writing. And they should all be logged in your complaints registers.

I am acting for two IFAs just now in various stages of investigations where the FSA allege that they are in breach of the rules for failing to follow their complaint procedures. In one case, the IFA decided it was just a "query" and dealt with it by phone. In the other, the IFA had a conversation with the client and then wrote to him on personal basis expressing his personal disappointment that the client should have complained.

It is obviously crucial that you analyse what the complaint is really about to determine how you address it and respond to it – but whatever you do it is folly to respond to it verbally. If ever there were a medium for a consumer misinterpreting what you say, whether that be due to selective memory or not, it is the spoken word.

Of course, an email or letter may be misinterpreted but you have time carefully to craft what you say to minimize the scope for misunderstanding or deliberate misinterpretation.

As soon as you have received a complaint – irrespective of the medium or the subject – write to the client confirming that you have logged it as such, issue a copy of your complaints procedure, and state that you will investigate it. Tell the client that FSA rules provide that you must issue a reply within 4 weeks and then a final decision within 8 weeks but state that if it is a complicated matter you may ask the client to allow you further time. And write to the client periodically to state where you are with your investigation.

Keep the client informed.

It is essential that you do not take the complaint personally – if you have a compliance officer in your firm then he/she must deal with it. If not, then get one of the other advisers or directors in your firm – you should have someone identified as the complaints officer - and tell the client who in your firm is dealing with it and why.

Once you have identified what the complaint is about, you should write to the complainant – a real old fashioned letter, not an email – and outline what it is you understand the complaint to be about and ask the client to confirm that.

When you have investigated the complaint, take time to craft the response. It is a requirement that you add to the response the warning that the complainant has 6 months from the date of the response to raise a complaint with the FOS, whose details you must give.

Handling complaints is not easy – and handling them the wrong way simply makes a bad situation worse.

As we move towards the implementation of the RDR, more IFAs will need to embrace the concept of life planning as the model for advising clients.

Over the last year I have been dealing with a number of FSA investigations into the promotion of UCIS.

In each case, the IFA under investigation has employed a life planner model of some description. It appears to me that unless an IFA is catering solely to what one IFA described to me as the “random product purchase” market then almost by definition they are involved in life planning to some degree. Not all IFAs, however, employ a life planner modeling system.

One major practical defence issue which has given me some considerable difficulty with the FSA, is that life planners being dynamic and not static tend to overwrite existing clients’ data as it is reviewed/renewed.

The problem that has created, and it is fairly fundamental, is that the IFA is opened to the charge that he has not taken and has not retained adequate KYC data. And that is a very hard charge to defend and defeat if the historic data is no more.

The solution is very simple of course but a matter of concern that few IFAs actually thought about it – save the entire life plan model at each stage of the advisory process/sale of each investment as a pdf. Even then, it is no guarantee that the FSA will not accuse the IFA of failing to have a “fact find”. Although there is no statutory or regulatory requirement to have a “fact find” signed by the client n file woe betide any IFA who doesn’t!

The other major issue with life planning is that it is perceived so differently by different FSA officers.

In one case the FSA officer is adamant that the IFA has used the life planner to force the client to invest in products that are away beyond his risk tolerance as the officer assessed that to be based on the clients existing investments.

“If you always do what you always did, you’ll always have what you always had” – so says a poster in one IFA’s office. And that’s the essence of the Life Planner.

If the client has ambitious goals and a short investment horizon, perhaps due to age or need, how does he get from where he is to where he wants to be? If the client isn’t willing to consider other/higher risk levels how does it work for him?

In my experience, “suitability” is defined by FSA and by the FOS solely by reference to ATR past but not present, and ignores the other aspects of the aims and objectives of the client in investing at all.

IFAs may argue all the technical issues they like about the level of advise, fee structures for what level of service, or whatever but if the investments you advise the client into or manage for him don’t do what they say on their tins they will do then I don’t care how sophisticated or how well heeled the client is they will still complain. And if you have used a life planner to advise the client then in all probability you’ll lose.

Sad but true.

The results of the Practitioner Panel survey, as reported in IFA Onnline on 7.02.11, make interesting reading.

That the majority of small firms believe that the FSA supervision of their business is too intrusive and too expensive can hardly be much of a surprise really, now can it?

Most online columns are constantly carrying articles describing the overbearing and bullying regulatory approach of the FSA.  I have contributed to them myself from the experiences I have gained in defending IFAs against the FSA.

The survey also found that the smaller firms are more likely to feel that regulation is excessive. I can suggest a reason for that – it’s simply that the FSA find it easier to bully and harass the small firm into submission than they do the larger firms.

Why is that?

Because many small firms do not have the cash resources, the forensic skills or indeed in many cases the spirit to fight back.

The FSA justify their investigative and disciplinary procedures, which no self respecting police force or judicial system would use, by claiming that they comply with their Enforcement Guide. They may do, but as the FSA wrote their own Guide how fair is that?

Despite the FSA stating that theirs is not a judicial process, which it most certainly is not, the manner in which they draft reports about their investigations, their procedures and the procedural documentation which follow are most certainly quasi-legal/judicial in form and terminology. IFAs are IFAs – they are not trained lawyers used to dealing with the likes of FSA investigators. And that is what the FSA investigators rely on.

The FSA make up their own rules. These rules, and the manner in which FSA officers excercise them are abuse of natural justice and the rule of law.

Online trading company London Capital Group (LCG) faces compensation claims of up to £5.5m if over a hundred investor complaints to the FOS succeed, according to a solicitor working on the case.

LCG, which is not to be confused with independent wealth management group London & Capital, confirmed it is dealing with a FOS query relating to commission rebating of a managed spot FX fund in the first half of 2009.

In a pre-result trading statement this month, LCG says: "LCG believes that should any liability arise from this, it will be immaterial in the context of the group as a whole."

Related articles

But Alasdair Sampson, a financial services lawyer who has lodged 113 separate investor claims against LCG at the FOS with the help of five IFAs who advised clients to invest in the Forex investment, says the company could face a bill for up to £5.5m.

He calculates this as the difference between his clients’ total capital investments and what they have been able to recover after alleged errors at LCG which they claim led to abnormal losses.

LCG says it stands by the sentiments in its trading statement.

The investors, who held accounts on LCG's platform, claim the financial services and spread betting company repeatedly over-rebated commission to clients.

It went unnoticed for several months because LCG failed to regularly reconcile its monies.

Sampson says the problem began when LCG had to reverse certain trades.

"It rebated commission on the trades without realising none had actually been paid. This happened six times but wasn't picked up because the accounts were not being reconciled."

The result was that clients' accounts collectively were overstated by about £1.8m higher than the true balances, he says.
"This effectively geared the trading so all the accounts were over trading so any losses were exaggerated."
Had the clients known at the outset that LCG was not going to perform frequent account checks to ensure each held the correct amounts, none of them would have invested, Sampson claims.

“If the complaints are upheld then I will be submitting to the FOS that the measure of compensation should be a full refund of the difference between the funds invested and the funds recovered," says Sampson.

Commenting on the £1.8m overstatement in its accounts, LCG says there has been "no further recovery of the professional client debt disclosed at the half year" and no provision has been made as the directors have been advised the amount is recoverable.
Elsewhere in the statement, LCG said its full year profit before tax for 2010 is in line with current market expectations with full results due later this month.

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FSA has made clear that it will be undertaking more intrusive inspections re UCIS in 2011 quite apart from the impact of the RDR in this area.

Any IFA who has promoted any form of UCIS should be considering undertaking a Past Business Review now in conjunction with their compliance advisers and taking remedial action now of their own accord.

If they wait until they are picked upon by FSA for a Supervision review they will be invited to vary their permission to exclude UCIS and if that invitation is declined then the FSA could seek to do it anyway. The concern must be that once you have varied your permission your would have difficulties getting them back.

I represent 5 IFA firms across the UK in connection with UCIS supervision reviews and investigations by FSA.

In two of those cases I advised the firms to refuse the FSA invitation to vary their permissions and, so far, FSA have not taken the issue further. I have argued very vigorously with FSA in these two cases and in one the matter will be managed out without being referred to Enforcement. The IFA’s permissions are unaffected. In the other, I am still awaiting to hear from FSA Supervision after I shredded their Supervision report as displaying a lack of understanding on the part of the FSA of the law and the Rues on UCIS and also as being wholly inaccurate factually not only as regards the client files but also compared to the terms of the Supervision Visit at which I attended and took detailed minutes.

In a third case in Supervision, where the IFA had agreed to vary his permissions before I was instructed, I have pointed out to the FSA that their S.166 Notice and Past Business Review Notice were both legally incompetent. However, as the Skilled Person had already reported that is proceeding. I have vigorously challenged the content of the SPR as failing to take account of all of the available exemptions and, indeed, the exemption that was in effect applied by the IFA. I am awaiting to find out whether that case can also be managed out in conjunction with Supervision or if it is to be referred to Enforcement.

In one case the issue of a client contact letter at the insistence of the FSA to say that the client may have been given unsuitable advice has wrought the destruction of the IFA firm, quite apart from the variation of permissions, the fines to be imposed and the eventual withdrawal of permissions.

If you are advised that you will be the subject of a Supervision Visit re UCIS, or indeed any other matter, don’t just leave it to chance – you need to prepare yourself and to be coached on how to deal with such interview. And that is not compliance but is where a financial services lawyer like me comes in – info@fsalawyer.co.uk

Whether the IFA owes a mere duty of care or the higher fiduciary duty depends on the nature of the service provided.

The word “fiduciary” derives from the Latin fides, meaning faith, and fiducia, trust. A fiduciary duty is the highest standard of care and those owing such a duty are expected to be extremely loyal to client, he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents.

In certain respects, therefore, the elements of the fiduciary duty are already embodied in the FSA Principles for business.

The fiduciary duty is a legal or ethical relationship of confidence or trust regarding the management of money or property between two or more parties, such as a trustee. It requires these persons to act in the best interests of their principals which is a standard considerably higher that the common law duty of care. In the world outside FSA regulation, a breach of such duty must be an intentional act fueled by an improper motive (such as dishonesty) or recklessness. Mere negligence or incompetence is not enough. The consequent penalties for breach are therefore more severe.

If the service is merely what one IFA client of mine who is under UCIS investigation terms it a “random product purchase” then it would appear that the ordinary duty of care applies.

However, if you are providing the holistic life planner form of advice then perhaps the higher fiduciary duty does apply and has always applied.

A word of warning though – the FSA appears to me to be ideologically opposed to the life planning model whatever it says. Believe me, that’s the experience of 3 FSA investigations in which I am involved with IFA clients.

The “traditional” approach to matching risk profile and ATR cannot not really work when using a life planning model which seeks to satisfy the clients aspirations simply because sticking to investments which are of the same risk rating as those the client already has defeats the purpose of life planning.

And of course whatever and however you advise now will be considered in minute detail by FSA in retrospect when you are under investigation.

As a lawyer involved in FSA investigations into IFAs – www.fsalawyer.co.uk - and not usually known for being stuck for words, an article in Citywire “RBS escapes enforcement despite 'series of bad decisions' on 2.12.10 momentarily shocked me speechless.

Why am I shocked?

Whilst we know that the headline reason why we as an economy are where we are, and why many people are suffering as they are, is directly and indirectly attributable to the practices and decisions of a number of the banks over a period time, I am shocked that the FSA Supervision review has been so short.

I am shocked that what would appear to us on the outside as reckless trading, at best, should be described by FSA as merely “bad decisions” whether or not there was any lack of integrity by any individual.

I am shocked that what is generally accepted to be a principal cause of and to be representative of the trading practices that brought this state of affairs about – the sub-prime derivative market – does not even get a mention!

I am shocked that that is the end of the matter without such a complex matter being fully investigated by FSA Enforcement and Financial Crime.

I cannot help but compare this to the IFAs I have represented and do represent.

If an IFA promoted investments of such obvious speculative-risk profile as sub-prime mortgage derivatives – how many counterparty risks are involved in that?? - to private clients in the same manner as the banks traded them would the IFA be considered by FSA Supervision just to have made “bad decisions”?

I would hazard a guess – just a guess mind you – that they would be referred off to Enforcement in the blink of an eye.

And when they land in Enforcement, would the whole thing be over in a matter of a few months? I suggest not.

I have one IFA client whose investigation by the FSA is now in its fifth year! And, after vigorous defence argument, what is the FSA’s case reduced to? Well, it disagrees with the risk rating the IFA attributed to a class of investments – the IFA says medium and the FSA says medium/high.

When an IFA is investigated by Enforcement do they look only at the particular product promotion? No, it’s root and branch. The IFA can then expect to be battered with accusations of all sorts of breaches and constantly threatened throughout with removal of authorisations, fines and censures.

It is difficult not to conclude that there are rules for some, and different rules for others.

Quite astounding.

PROTECTION POLICIES – PROTECT YOURSELF

So, FSA is now looking at the sale of standalone protection policies.

I would guess that the majority of IFA firms will sell standalone protection policies of one sort or another, even if their main activity is investment business.

It is not unreasonable to assume that at the end of the 6 month period allowed by FSA for firms to provide written confirmation of their compliance with ICOBS that there will be a number of firms selected for a Supervision visit.

For those firms which have not experienced a Supervision visit from the FSA let me caution them to take the time provided to check not only that their sales are compliant but also that the files clearly show that they were and are complaint. I am not a compliance adviser but an IFA defence lawyer www.fsalawyer.co.uk - this is what I do.

Firms who have had a Supervision visit, for instance in relation to traded endowments or the promotion of UCIS, will already know what they can expect.

The basic problem with the regulatory system that IFAs have to follow is that it is based on generically worded Principles for Business and very specific but mostly opaquely complex Rules.

Interpretation of these Principles is open to entirely subjective interpretation by the Investigating Officer. The Rules are very long on specifying the IFAs duties, responsibilities, what he has to do and when. They are somewhat short on any guidance let alone actual prescription as to how the IFA goes about his job.

The obligation on the IFA is to know his client and to gather sufficient information to enable him to give suitable advice to be confirmed in a statement of demands and needs. There is absolutely no guidance as to how that information is recorded, and how it is presented.

Anticipating that you may be selected for a Supervision visit you can prepare now - your records already are what they are, but you can use the time allowed to ensure that the right documentation is in the right place. You should also use the intervening period to ensure that you are fully acquainted with the ICOBS not only as regards the general import of the Rules but also that you know the actual clause numbering of the various Rules that apply.

I have a number of UCIS cases where there is a real issue with the FSA claiming the IFA did not know the Rules when clearly he understood what they required him to do although he may not have been able to recite the clause and sub-clause numbering.

Preparing for an Investigation isn’t a process that starts the day before, or the week before. It should be undertaken from the very outset of trading but, in this instance, you have advance notice from the FSA. Know the Rules and how to apply the Rules. But above all, record the fact that you know them and have followed them.

Remember, if it’s not on paper, then it didn’t happen.

IFAs will have read with interest the recent decisions by the RDC overturning FSA’s rejection of applications for authorisation.

In any dealings with the FSA, whether it is an application for authorisation or an investigation, IFAs should not merely just give up and meekly accept whatever the FSA say and decide.

FSA is often not very good at all in investigating supposed breaches of the rules, and is even less able objectively to report on them to the RDC. It so often goes into an investigation with a predetermined outcome in mind. 

Too often the FSA gains a win, and another scalp, in its investigations but only because the IFA hasn’t the nerve to stand up for himself. IFAs must be prepared to defend themselves, and to do so robustly. 

The process of an investigation appears exceedingly intimidating, and it is designed to intimidate, as does the attitude of many FSA officers but as I have found so often when defending IFAs the officers don’t know the law, they don’t know the rules and sometimes don’t know their own processes quite as well as they think they do. Very often the bullying abates or stops when the IFA fights back. 

And it is the process of an investigation where the FSA is weakest. If you attack that and do it hard and repeatedly at every turn they make concessions, and they are often found wanting. 

Whilst it is part of the FSA, it is clear from its decisions that the RDC does exercise independence. IFAs must not only not be scared to take the FSA to the RDC they must be encouraged to do so.

It isn’t easy and it isn’t cheap – but the alternative is to let the FSA officers steam roller you.

Regulation is an essential part of a stable market but it has to be good regulation. Putting the FSA to the test rigorously will improve their performance and therefore improve regulation. It will also measurably improve your chances.