Part of the work that I do now involves reviewing announcements from several regulators around the world, on enforcement action against advisers. This is interesting and gives a me a distinct perspective on the work of the Financial Conduct Authority (FCA) as well as highlighting the similarities and differences between the regulatory regimes of the different countries involved.
However, what has become obvious is how much human nature is the same in all these areas, with a range of offences being committed, by people in similar positions, with the same opportunities.
One that struck me recently was a media release (21-308MR) from the Australian Securities & Investments Commission (ASIC) on a former financial adviser who had pleaded guilty to five offences. These included dishonestly providing backdated wholesale client certificates to ASIC to persuade it to stop its enquiries, or modify them, as well as using fabricated evidence, like doctored emails attached to a statement to the regulator and supposed witness statements from individuals.
Firms must consider how SMCR impacts on how they deal with such activity by employees of any level
So, dishonesty, forgery and lying to the regulator, he deserves all that he gets I hear you say. But the evidence I have seen suggests that this is not an isolated case, in Australia or in the UK and means that a percentage of people working in financial services have done or will do something outside the regulatory rules and requirements, or the rules of the firm they work for, on one or more occasions.
The cases I have reviewed often involve people who run their own firms or control significant elements of a firm in which they are employed, which gives them the opportunity to bend or break the rules, without others being able to spot it. That’s not the same as an employed adviser in the UK you might think, but many firms encourage them to think of their role as running their own part of the wider business and allow them a degree of control, so how is that different?
It comes down to the policies and procedures of the firm involved and what checks and controls they have in place to ensure that the potential risks involved are managed. Those working in T&C form a part of those checks and controls and indeed I came across two such cases in my time as a T&C supervisor, both of which involved setting up new pension schemes for different employers.
In the first case, the individual had mislaid an illustration, possibly giving both copies to the member at their meeting. However, instead of contacting the individual, checking with Compliance, or getting a copy from the provider, they decided it would be much quicker to create their own version. Using one of the other members’ illustrations as a template, they took that home and used their own computer to change elements of the illustration, to make it look like the one that was missing.
However, the illustration had a serial number on it which they hadn’t changed, so when sample post-sale file reviews were undertaken and the reviewer checked the two files one after the other, the inconsistency was noticed, and questions were asked.
In the second case, an adviser had completed most of the paperwork with an employer for a new pension scheme, in November, with agreement that the scheme would not go live until January. However, the adviser was aware of the year-end deadline for salary and bonus awards, and having completed the original paperwork themselves, decided to add the missing elements to make the scheme live from December, reasoning they could blame it on an administrative error to the client.
However, on receiving the welcome letters from the insurer the employer was less than sanguine about the apparent error and complained to the adviser’s manager, who naturally investigated what had occurred and gradually the story unfolded.
In both cases the advisers concerned were dishonest, they had undertaken forms of forgery and had lied in the process of trying to cover up what they had done before the truth came out, so were either of them that different to the case from Australia?
These cases occurred before the advent of the SMCR for solo regulated firms, which introduced both the annual certification requirements and the regulatory reference concept, which puts the onus on regulated firms to provide references in a specific format following an FCA template. Such references must be requested when permitting or appointing someone to perform a controlled function, issuing a certificate under the certification regime, or appointing a board director.
The reference template asks firms to state all information of which it is aware that it considers to be relevant to an assessment of whether an individual is fit and proper. This covers the six years before the reference request or, in the case of serious misconduct, at any time. The activity conducted by the advisers I mentioned therefore should certainly now included in a regulatory reference.
It should also form part of the firm’s consideration during the annual certification process and should include evidence of remedial action and subsequent training to mitigate any errors. That is of course if they were not considered serious misconduct, in which case the advisers could be dismissed, but a record of the disciplinary process would then exist on their personnel file anyway.
Firms must consider how SMCR impacts on how they deal with such activity by employees of any level. The FCA’s principles have been with us since before SMCR but Principle 3: Management and control, and Principle 11: Relations with regulators, would be a focus by the FCA in review findings. Indeed, the changes were partially introduced because of a reluctance on the part of some firms to fully address such issues, instead of sending advisers back onto the merry-go-round of employment with neutral rather than negative references but doing so now could incur the wrath of the FCA.
For solo-regulated firms, the SMCR rules came in from 9 December 2019, with a transition period for certain requirements that was extended due to Covid-19 and ended on 31 March 2021. Many firms are still therefore in the initial stages of developing an understanding of the day to day working of the new rules. However, I suspect it will not be too long before the FCA focuses on assessing the success of the introduction of the regime and will want to look in depth at the certification process.
Based on the cases they deal with the FCA understands something about human nature and if they find little or no evidence of any disciplinary action or development requirements in the certification records across firms, they will begin to question what firms are doing…or what they are hiding.
It is important therefore for those in T&C to ensure that this message reaches those in charge of the firm and ensure that it is understood. It would be all too easy for the management in the business writing part of a firm to continue to do things in the way it had been done in the past. However, the judicious use of garden leave, with nothing documented on an employee’s record, would put the whole firm at risk of censure by the FCA. This could result in the potential imposition of fines and there is the potential reputational risk to consider and its effect on client confidence in the firm.
In the past the maxim has been, if it isn’t written down, it didn’t happen, but for these requirements under SMCR and the use of regulatory references that may need be changed to, if nothing is written down, it’s an admission of guilt.
