Learning the lessons from an FCA Review

One of the many lessons learned within the compliance profession is the importance of avoiding snap judgements. While first impressions can sometimes be accurate, a closer examination often reveals nuances that shift the initial view.

This principle was highlighted recently during a discussion between Nigel Sydenham, Director of Compliance Training at CCL Academy, and a group of senior managers from a cross-section of firms, where they were asked to consider the relevance of a particular FCA publication to their organisations.

Given the diverse range of firms represented, it was, perhaps, unsurprising that only around 20% of the managers considered that the FCA’s ‘Multi-firm review of consolidation in the financial advice and wealth management sector’ would be relevant for their firm.

However, despite the title, the review findings have much wider application than a first impression might suggest. Indeed, putting generally applicable regulatory messages in relatively niche publications is a time-honoured regulatory tradition.

In conducting the review, the FCA looked at several firms which were acquiring independent financial advisers (IFAs) and wealth management businesses. The review considers a range of risks which are associated with this type of activity. Some of them, such as the impact of debt being used to fund acquisitions, are specific to firms undertaking this type of business. However, several of the regulator’s key findings undoubtedly have wider application.

Take, for example, the first of the ‘good practice’ findings listed in the review:

Groups with a clear structure, strong governance and risk management processes are likely better placed to achieve sustainable growth and deliver good outcomes for clients, staff and shareholders.

This finding, which essentially restates the basic requirement for effective governance and risk management within firms, applies to all firms, not only those that fall within the scope of this particular review. Similarly, under ‘Practices which could increase harm’, one of the key findings refers to:

Groups failing to grow their compliance and governance infrastructure to keep pace with their rapid growth.

It is, of course, inevitable (and appropriate) that smaller firms will tend to have simpler governance and compliance frameworks compared to larger firms. However, firms must ensure that, as they grow, these frameworks grow with them, to ensure they remain robust and proportionate to the level of risk the firm faces.

The review goes on to list some further findings relating directly to the skills and experience of senior managers, observing that:

[Firms] need to ensure leadership have sufficient knowledge and experience to deal with increasingly large and complex issues.

Again, this finding is relevant for all firms that are either growing or undergoing other forms of business change, such as the launch of new products or services. Indeed, the FCA comments positively regarding those firms that had taken specific steps, such as training, mentorship or recruitment of new leaders, to ensure that senior managers were equipped to deal with new and emerging issues.

Conversely, the FCA found that some of the firms in the review ‘did not have independent challenge on boards. This lack of challenge meant that the firm did not benefit from the ‘unbiased scrutiny of management decisions’ that the presence of such challenge would have provided.

Finally, the review addresses the perennial problem of conflicts of interest. While there are specific conflicts which can arise in the context of businesses which are seeking growth by acquisition, the presence of potential conflicts within a business is almost universal.

In the review findings, the FCA returned to a theme which it has raised previously – that it is not sufficient for firms to have policies and registers, they must actively manage any conflicts they identify:

We identified conflicts of interest registers which recognised many of the relevant conflicts at play. However, consideration of how to mitigate them could be unclear or under-developed.

In short, those who want to understand the FCA’s expectations of regulated firms sometimes need to look beyond the headlines of FCA publications and identify the key messages which are relevant to all firms. In its conclusion, the regulator makes clear that it is not imposing any new requirements – it is simply articulating existing obligations:

We are not setting new expectations. Our findings are intended to help firms understand those that already exist.

It encourages firms to review their governance and risk management frameworks, to ensure that they can support ‘resilient and well-managed growth’.

All firms, not only those within the scope of the review, would be well-advised to follow the regulator’s advice.

To implement effective compliance training across your firm with courses for front and back office staff, the compliance team, and senior management and the board, get in touch.

Nigel specialises in training boards, senior executives and other staff on the impact of regulation and regulatory change.

He is a CFA Charterholder and Chartered Fellow of the CISI, with over 20 years' of industry experience.

With a background in compliance in private banking and wealth management, Nigel has a particular interest in effective corporate governance and the management of compliance and regulatory risk. His interests also include issues relating to ESG and climate risk, conduct and culture (including non-financial misconduct), and all aspects of financial crime prevention, as well as the impact of fintech on compliance and regulation.

Recent assignments have included briefing multiple boards and executive teams on the Consumer Duty, delivering compliance and ethics training for senior managers and front-office staff and creating a user-friendly risk and compliance handbook for a major bank.