The FCA one year on: firms need to take great responsibility for compliance

By David Tryon | 3 April 2014

This month marks one year since the Financial Conduct Authority (FCA) arrived on the scene with a tough new remit to clamp down on client detriment before it happens. This has led to an onus on firms to prove they have incorporated the regulator’s Treating Customer Fairly (TCF) principles into their business model and can prove the six TCF outcomes are being followed at every level.

TCF may have become ingrained in the financial services psyche over the past year, but while firms are adhering to the rules, they may not be effectively demonstrating the process and therefore could still fall foul of a more pro-active regulator. Since the launch of the FCA, companies need to provide the regulator with a clear TCF audit trail in order to comply with stricter requirements that have formed part of the FCA’s regulatory shake-up.

Most firms, if asked, would confirm they are treating their customers fairly, yet may find this difficult to prove because of a lack of detail about client conversations, a failure to prove that key messages have been relayed, and an inability to show that a client has understood and agreed to the products, services or advice they have signed up to.

While it is not necessary to have a specific script for staff to follow in order to prove compliance with TCF, technology that provides checklists and intelligent prompts can enable staff to demonstrate they have informed clients of the necessary information and disclaimers and create an audit trail that proves adherence.

A particular area of concern for the regulator and the industry is the division between advice and guidance set out under the Retail Distribution Review (RDR) and the need to inform clients that they are not receiving full advice when they are receiving guidance – a subtle but crucial difference. When engaging with clients, there needs to be confirmation of the service that is being provided, whether it is full advice which leads an individual down a path towards making a particular decision, or information which does not. For many companies, however, demonstrating compliance with these rules is difficult, as they are dealing with multiple different systems and an unstructured approach.

This lack of centralised system has a knock-on effect; it means staff cannot work in the most time or cost-efficient way, as they may not have access to the client details they need and clients therefore cannot be dealt with promptly. Lack of process also makes it difficult for senior management to identify weaknesses in workflow and processes, or to pick out staff members who are not performing to the best of their ability.

One year since the arrival of the FCA, the financial services sector is still changing, but not of its own volition. The new-look regulator has forced a sea-change in the way financial services is regulated and it has taken on a new role of educator, rather than carrying on the ‘policeman role’ of the FSA.

While this makes for a more open and engaged regulator, which is a positive for the industry, it is also forcing companies to think more about compliance and take responsibility for it.  The FCA is now more likely to spend as much time auditing a firm on its own capability to pro-actively identify errors in TCF themselves, as it is to focus on investigation of the business that has previously been written.  As such, a company that cannot prove it is following TCF principles should be concerned about a visit from the FCA, which takes a dim view of firms that it perceives are not working in the consumers’ best interest.

This new approach means a company can no longer maintain the status quo. We are moving from an historical analysis of what happened to demonstrating that a detrimental event is not going to happen again.  Maintaining the status quo is therefore not something the FCA wants financial services firms to do.  In its Risk Outlook[1] paper last year, the FCA warned specifically of ‘biases and heuristics’, or the damage that can be done by maintaining a certain procedure or process just because a firm has always worked in that way.

There is of course a cost to this changing face of compliance, but instilling a robust TCF process in a firm can help to manage the costs that come with increased regulatory scrutiny, both in the near term and in the future. A financial services sector that is working towards the goal of better consumer outcomes is to be applauded, but the FCA should be wary of over-regulating the sector, since the cost of implementing new systems and rules in an organisation is typically passed on to consumers.

For all these reasons, the FCA needs to work collaboratively with financial services firms, at both an individual and industry level, and take the role of adviser rather than inspector in order to forge mutually beneficial relationships.  After all, it is not in the interest of consumers or the industry for compliance to come at the expense of innovation.

By David Tryon, Director of Client Management, Business Process Solutions, DST

[1] FCA Risk Outlook 2013, FCA, March 2013

Become a bobsguide member to access the following

1. Unrestricted access to bobsguide
2. Send a proposal request
3. Insights delivered daily to your inbox
4. Career development