Networks are failing on compliance

One might expect appointed representatives (AR’s) of networks to be in better shape than directly authorised (DA) advisors when it comes to compliance.

Especially given that the networks sell their services on this basis. However, the findings of a major research study by MS2M have found that AR’s don’t perform any better than DA’s.

Furthermore, for those firms who had appointed representatives of their own, the results were also disappointing. This might indicate a possible failure on the part of the principal firms to sufficiently monitor the activities of their AR’s.

Based on a detailed questionnaire completed by 130 intermediary firms in March 2008, 40% of all firms did not have business plans or business continuity plans and 25% did not have any measures in place to address peaks of work.

Just over 50% of those sampled did not do regular reconciliation of accounts or solvency calculations and 65% of firms had no conflict of interest measures in place.

Generally there was lots of evidence of ‘seat of the pants’ management techniques. One factor which was specific to the GI sample was that 50% of those questioned could not confirm they had any measures in place and could not evidence contract certainty.

Although not specifically an FSA requirement, this is an Association of British Insurers code of conduct issue and one that could potentially lead to consumer detriment say in the event of a claim.

67% of those respondents in the mortgage sector indicated they had met the Treating Customers Fairly (TCF) requirements and 73% in the GI sector.

However, when answering other questions which would have had a material affect on their ability to have met the requirements, there was lots of evidence to suggest this couldn’t possibly be true.

Our view is that this would seem to indicate that there is still misunderstanding as to what the actual requirements are to meet the TCF outcomes and what areas of the business are affected.

Although the deadline for having management information to support TCF has passed, the deadline for demonstrating that all firms are consistently treating customers fairly is December 2008.

It is difficult to see how this will be achieved for most firms when many of the basics do not seem to have been identified as having an effect on TCF and so do not seem to be being addressed.

Advisors in both the GI and mortgage sectors are failing to recognise the correlation between TCF expected outcomes and Training and Competence, Conflicts of Interest, Business Continuity Planning and management of AR’s.

Some very fundamental deficiencies exist which indicate a basic lack of business awareness and good practice. The TCF message seems to be perceived or interpreted as an ‘add on’ requirement.

This has resulted in firms looking to comply at the very basic of levels without really understanding how TCF should permeate throughout the firm.

The findings clearly demonstrate a need by many firms to improve their compliance infrastructure in certain areas. To be falling short of 100% in certain key areas can prove to be disastrous.

We have seen small mortgage brokers banned by the FSA recently for continually lacking in basic Systems and Controls and failing dismally in all the areas of weakness identified by this research.

Small firms must understand that they are not exempt from FSA regulation and if they ignore their commitments they must face the consequences.

Recent FSA work has shown that AR’s place an over reliance on the quality of the supervision and compliance being provided by their network. Our findings would support this view.

Networks themselves need to do more about their supervision models and how they conduct monitoring activity, including doing more about business compliance, including assessing financial strength and periodic fit and proper tests.

Julie Alderson is director of MS2M

The views expressed in this article are those of its author and do not necessarily represent those of the company he represents, IFAonline or any other Incisive Media affiliated organisation.