FSA will target slow-to-transition adviser firms

Advisory firms not actively preparing for the RDR will be considered investigation targets by the FSA, warns a City lawyer.

Simon Morris, partner at CMS Cameron McKenna, says the regulator is linking advisers’ efforts to transition to a fee-based model to the risk of customers not being treated fairly.

Firms whose current practices will be banned post-2012 are being seen by the FSA as “flawed” and likely to pose a greater risk to customers, Morris told delegates at this month’s Personal Finance Society (PFS) conference.

In an RDR consultation paper last year, the FSA said it was considering providing ‘staging posts’ for firms to indicate how much progress they have made in the transition to be RDR-compliant.

“If the FSA believes you are not future proofing your business by preparing for regulatory change, it will say your business model is under threat. Then it will believe you are putting customers at risk because you are under pressure to mis-sell,” Morris says.

He says firms with a narrow focus on pension switching or replacement business will also be considered “flawed” and targets for FSA investigation.

To avoid FSA scrutiny, IFAs must be more than just compliant, they must show they have embedded TCF throughout the business, says Morris.

“What will mess up your future is not the RDR or the economic downturn, but the FSA.

“The FSA challenges firms when they fail to show justification of suitability and of managing the risk of mis-selling. Everything is about evidencing TCF at every level.”

Morris, who worked on the Park Row case in which CEO Peter Sprung was held personally accountable for advice failings at the national IFA, says telling the regulator you relied on the compliance team to manage risk is “not good enough”.

“Now when the FSA investigates a firm it includes the CEO, the chairman, the managing director, and all the senior management.

“You need to ask yourself: do you have the governance in place to maintain effective systems and controls to govern broking risks?”

He says the FSA expects every firm to have an active management board using clear strategies to oversee risk functions.

“The FSA’s expectation is management must challenge, not just rely.”