Perspective News

Systems and controls that satisfy the regulator today will not necessarily get its approval come 2013.

Julie Hepworth, Group Regulatory Manager, Perspective Financial Group talks to FT Adviser.

All compliance oversight officers, directors and senior management of FSA-authorised firms will know only too well about the wide ranging responsibilities and demands of having adequate systems and controls in place.

The FSA holds great store by ensuring such systems and controls are not just up to scratch but performing the functions they are meant to. However, what may satisfy the regulator today will not necessarily meet approval once we move into 2013. The advent of RDR will bring with it a sea change for IFA firms in a huge variety of areas and systems and controls is no different with a number of new additional demands which will have to be met. So, what are these new demands and how can firms ensure they are on top of them?

Starting at its most basic a firm’s decisions with regard to its ongoing status will clearly determine the systems and controls that need to be in place. For example, if the firm has committed to meeting the definition of independence post-RDR, it will need to have a robust research process in place that all advisers follow. This is to clearly evidence that advice on retail investment products is unbiased and unrestricted, and based on a comprehensive and fair analysis of the relevant market.

This introduces two new considerations. First, how will the firm ensure that they are competent to advise on all retail investment products? For a lot of advisers, the retail investment products definition will mean they are advising on areas they have not previously advised on such as structured products, unregulated collective investment schemes, investment trusts and ETFs. It will be essential for firms to evidence adviser competence in all retail investment product areas at the outset and on an ongoing basis; this could be done through knowledge testing, for example.

Second, is how the firm proves to the regulator that they are satisfying the definition of “independence”. If the firm decides that a certain type of retail investment product is not suitable for the client bank, while this is an acceptable stance, the onus will be on the firm to evidence how this decision was arrived at both initially and on an ongoing basis. Therefore, firms will need to have clear research requirements in place to ensure that consistent compliant standards are achieved.

Looking next at the firm’s investment and client service proposition, we can see that as more practices adopt centralised investment propositions utilising in-house or third-party solutions, inevitably regulatory scrutiny will increase. Indeed we have already seen this with the commencement of the FSA thematic review in August. Therefore thorough due diligence must be conducted and evidenced, regular research retained, and the firm must ensure that all advisers understand when the centralised investment propositions and/or platform may not be suitable for clients.

Audit

Post-RDR, firms cannot levy ongoing charges unless an ongoing service is being provided. This introduces two new systems and controls requirements; the need to evidence every aspect of the ongoing service being provided and the need to audit the delivery of the service. The rule of thumb will be the old adage of “if it’s not written down, it didn’t happen”.

Firms will need to ensure that they have a way of evidencing each aspect of the ongoing service from rebalances taking place at the agreed intervals through to providing written reports to clients confirming the content and outcome of review meetings. The internal audit will need to check whether every aspect of the promised service is being delivered to that standard and within the agreed timescales. I envisage this being the subject of a thematic review post-RDR so it really will be essential for firms to have controls in place to ensure that all aspects of the ongoing service are being delivered. Contingencies need to be in place to ensure the ongoing delivery, for example, in the event of an adviser leaving the firm. A centralised diary system instead of each adviser using their own individual diary system will address this.

Adviser charging is clearly one of the most important parts of RDR. Where the adviser charge is not being collected via product or platform provider facilitation, firms will need to manage the collection of fees directly from the client. While there is no regulatory requirement to issue an invoice, this will probably become the norm. This method of payment introduces the need for effective debtor management, something that most advisers have probably not had to consider in any great detail, given they have previously relied upon providers paying them.

Again, the RDR is designed to improve the standing and overall status of IFAs and there are significant improvements firms will have to make in terms of their advisers’ professionalism. First, firms will need to ensure that all advisers hold a valid statement of professional standing at all times whist they are acting in an advisory capacity. For firms with a high number of advisers this will become quite labour intensive if the chosen professional body only shares SPS information with the individual. Firms will be reliant upon their advisers to provide evidence of their SPS and will need to monitor annual renewals.

Second, the new CPD requirements will require firms to monitor each adviser’s progress in completing the required 35 hours of annual CPD of which 21 hours must be structured. Not only will controls need to be in place to measure the quantitative aspect but also the qualitative. This will require spot checks to ensure that structured CPD does indeed address a development need in a measurable way.

The reporting structures firms have in place will also need augmenting prior to the move to RDR. FSA Policy Statement 11.13; Data Collection confirmed the more detailed Gabriel reporting requirements for disaggregated data which drives home the importance of having a good back-office system in place capable of producing data in the required format. Firms will have to report revenue broken down into income generated from product or platform provider facilitation and that paid directly by the client, income received for initial advice and ongoing service, and the number of clients that both started and stopped receiving ongoing service during the reporting period. The accuracy of this data is of course only as good as the way in which it is input. This will require additional training for the staff that input the data and will need to be ‘sense-checked’ for accuracy at regular intervals.

Finally, internal reporting measures will need to be boosted. The dawn of the new regulator, the Financial Conduct Authority will see increased scrutiny of senior management in the event of investigation. It will become increasingly important for senior managers to ensure they are satisfied with the systems and controls in place and they comply with the firms’ obligations under the regulatory system. Where deficiencies are detected, appropriate measures should be taken to address them. This awareness should be evidenced as a minimum through board meeting minutes covering all of the new systems and controls responsibilities highlighted here along with existing responsibilities.

As can be seen, these systems and controls amendments will require considerably more than a tweak here and there; these are substantial further burdens for all firms who wish to progress smoothly through RDR and beyond. Indeed, it may be in a firm’s best interests to seek outside support in order to ascertain their current status and the work that must be done to bring them up to speed. Certainly, one would expect significant regulatory scrutiny on all these areas post-RDR and therefore taking the time to outline a deliverable strategy now, should certainly pay dividends when we make the move into 2013.