19th February 2009

Compliance tip - February 2009

This compliance tip is applicable to all retail intermediaries.

The Financial Services Authority (FSA) has published its Financial Risk Outlook 2009 (FRO) outlining the main risks facing firms, consumers and the regulatory system in the economic downturn, in particular the challenges created by banking sector and real economy deleveraging. Firms are also reminded therein of the importance of treating customers facing difficulties with fairness.  FSA also desires that “consumers will need to be able to identify warning signs that might suggest they are getting into financial difficulty, should be cautious of financial deals which seem too good to be true and know where to go for impartial finance advice”.

The FRO is divided into three sections:

• Financial and economic crisis sets out an integrated view of the macroeconomic, financial and regulatory developments which lie behind the crisis.  This is then mainly concerned with the likely future regulation of banks.
• Economic outlook describes a central economic scenario drawn from various forecasts focusing in particular on how deleveraging is likely to affect firms, markets, consumers and the FSA.  Alternative scenarios are then explored.
• Outlook for financial sectors and consumers identifies the risks and implications of the financial and economic environment for firms, market participants and consumers.

The third section will be of main interest for retail firms. In this part the FSA consider the foreseeable environment under the headings of ‘Changing structure of the retail intermediary sector’; ‘Sustainability‘; ‘Management and control’ and ‘Quality of advice’ and consider various factors and make comments thereon. These are finally distilled into three ‘Key messages for retail intermediaries’ which read as follows:

• "Measures need to be taken to ensure the sustainability of their business model, particularly in terms of ensuring that they have the financial resources that will enable them to withstand the current economic and financial climate, while still ensuring that they treat their customers fairly.
• Robust management and systems and controls must be in place. Firms should resist the temptation to reduce expenditure on compliance given that pressure on income and profitability could tempt advisers to treat customers unfairly or act fraudulently. Firms with appointed representatives should ensure that they continue to have compliance resources in place that reflect the risks inherent in their business.
• Advisers need to do more to ensure the quality of the advice they give, collecting sufficient information from consumers so that advisers can properly assess their needs and recommend suitable products. If firms do wish to diversify into new areas as a response to difficult market conditions, they should ensure that their advisers are competent, and have appropriate knowledge and experience.”

Key Action Point

These messages echo various pronouncements we have seen emanating from FSA recently and all retail firms need to take careful heed of their content.

By publishing the FRO, the FSA seeks to raise awareness of the key issues facing it and the regulated industry and to place the actions and decisions the FSA makes in context.  The FRO's conclusions are a key element in the FSA's priority-setting arrangements which are set out in its Business Plan. Firms may well wish to also review the contents of that further document.

Help

Any firms requiring further immediate guidance on these issues should contact their usual Consultant.