'Get your compliance process right or prepare for crisis'

The first focuses on the mechanics of the financial advice process, identifying the various things that can and go wrong during it and then covers issues that can appear peripheral like complaint handling.

The second looks at the way firms approach compliance more generally. 

We can list where financial advisers have been known to go wrong: 

• inadequate client agreements that fail to describe clearly the service offered and the remuneration being taken; 
• badly documented fact-finds;
• inadequate attitude to risk assessments; 
• recommendations that concern products or situations that the adviser or firm do not understand; 
• poorly drafted suitability reports where the recommendations and their downside lies obscured by pages of unnecessary risk warnings and standard paragraphs; and
• inhibited by a shortage of resources and the fear of PI insurer interference, complaint handling often lacking the required independence and detached response. 

The second approach seems needed if we want to learn why issues like these recur. To do that, we have to look at adviser firms’, and indeed the whole industry’s, relationship to compliance and those who work in it.

This varies enormously from people who perceive the area as a potential lifesaver to many who consider the subject to be the enemy. Neither approach helps a great deal.

Understanding compliance 

Firms would protect themselves and their clients better if they and the people they employ or engage to help them in this area had a better understanding of compliance, what it does, how it can help and what good and bad look like.

Understanding compliance may be a first step. It does not mean 'not breaking the rules'. Humans make mistakes and some rules require a super-human effort to understand let alone observe.

Anyway, good compliance often involves explaining to people that certain behaviour or products although not banned will probably lead to trouble and cannot be allowed.

Too many firms buy procedures and fail to adapt them to their way of doing things.

Many buy in their compliance from outside: file checkers, complaint handlers, procedures and help filling in regulatory forms and reports.

However, even in the tiniest firm, compliance officers must have the right personality, qualifications and skills to do the job credibly. They have to take responsibility for what they buy and adapt it to their firm.

In bigger firms, compliance cannot sit in an ivory tower; it has to engage with the business, show its value while not being kicked around. 

Ensuring compliance

Good people in this area have certain characteristics: integrity, courage, resilience, judgement, curiosity, communication skills, knowledge, diversity from the rest of the business and above all else 'feel'. The last point, the ability to sense when something matters and when to intervene or not, may be the most important thing of all. 

We then need to list the compliance tasks in the same way that we looked at areas of difficulty for firms. Heading the list should be ensuring that the conditions of authorisation, approvals and certifications have been done correctly. This includes checking forms that new advisers sign.

Errors or even accurate information at the recruitment stage often supply hints that firms should not be recruiting individuals or, if they do, only with strict supervision.

Ensuring that the business has the required capital keeps the Financial Conduct Authority happy and provides the firm with more shock absorbers than many have when things go wrong. 

Beyond ensuring compliance with the conditions of trading, the traditional view is that compliance drafts procedures, advises, reports and handles the regulator. Too many firms buy procedures and fail to adapt them to their way of doing things or add controls that their work environment requires.

Ideally, the author of the procedure, or perhaps here the adaptor, needs to work with the people who are going to follow the processes being described. Interactive training should flush out issues with the document and help those expected to follow it to understand how it works.

A similar exchange can help the firm review and update these processes. 

Advisers and regulators often complain about tick-box monitoring. All too often checkers focus more on whether certain documents exist than whether advice given could be unsuitable.

Firms sometimes create their own problems by either hiring this type of support or protecting the bulk of their more sensitive files from proper scrutiny by cherry-picking less controversial cases to be considered.

Firms need to hire good (not grey form-ticker) compliance people and listen to them.

One has to wonder why nobody picked up the recent British Steel and other pension transfer problem files and spotted a pattern of trouble ahead. Perhaps they did and management just did not want to know about the issue. 

The relationship between compliance and business is at its most acute here. To advise, most people (including the author) need a reasonably strong ego. To accept recommendations that may cast doubt on the firm’s business plan and general competence requires strength that relatively few have. 

This may explain some of the problems faced by the industry in obtaining and accepting advice. Compliance has to invite the business to seek its help here and sometimes provide it without waiting to be asked.

Advisers have saved their businesses by seeking opinions on the advisability of processing high-risk insistent customer business (no). Opinions have to go beyond just warning the business of problems or a yes/no reply.

A board hell-bent on a particular approach will tune out a simple recommendation. Compliance may have to set out in gory detail exactly what the rulebook says and why the proposed behaviour will likely generate problems.

In fact, operating in a highly regulated environment, serious advisers often respond well to being shown the relevant provisions.

Responding with compliance

When things go wrong, compliance (internal or external help) should take centre stage. Immediately, the business needs to know the extent of professional indemnity insurance. A small group of solicitors skilled in that specific area can help enormously.

Beyond that though, most mis-selling, staff misbehaviour and similar problems need to be handled by compliance dealing with the regulator. Suing people is extremely rarely the right answer.

The compliance playbook for handling disasters basically consists of telling the regulator as quickly as possible what has happened and what appears to be the source of the problem.

Since the FCA believes that systems and controls lie at the heart of most major incidents, an offer to review them and the business’ operating procedures almost always goes down well. 

When bad things happen, firms sometimes struggle to understand what went wrong. The easy and almost invariably wrong option is to select a bad apple whose departure has cleansed the organisation. In practice, organisations allow or even encourage these characters to behave as they do.

The effectiveness of compliance depends on the people engaging with it both internally and externally.

They should instead take a proper look at how they enabled the people concerned to act as they did. It could blame compliance. However, a review of board minutes or other documents could reveal that management ignored warnings.

A change such as a decision to engage more paraplanners centrally and fewer advisers could improve controls while increasing profitability. The existing team can do more profitable work because somebody else perhaps better equipped to do some of the key jobs is taking care of them. 

So, where do we go from here?

Firms need to hire good (not grey form-ticker) compliance people and listen to them. They also need to understand compliance and the different ways in which good, bad and somewhere in-between standards in that area operate.

The effectiveness of compliance depends on the people engaging with it both internally and externally. Competent consultants can identify and advise on most of the classic technical problems described at the start.

However, the absence of follow-up from management frequently prevents compliance from becoming central to adviser businesses. That creates the conditions for the next crisis. 

Adam Samuel is a compliance consultant and author of Compliance – A Short Book