The Financial Conduct Authority (FCA) has used its suspension power for the first time, banning two of the Financial Group’s (the Group) subsidiaries, Financial Limited and Investments Limited, from recruiting new Appointed Representatives (ARs) and individual advisers for a period of four and a half months. The firms failed to ensure that their ARs and individual advisers were adequately supervised and controlled to minimize the risk of mis-selling and the provision of unsuitable advice to consumers.
Networks play an important role in financial services and it is critical that they have access to quality management information and risk-focused systems and controls so that they can effectively discharge their responsibility to ensure that consumers get proper advice from their ARs. The punitive sanction is intended to have a financial impact on the Group, which generates revenue from its ARs by way of fixed fees. The ban is intended to deter the firms and other similar network firms in the market from committing similar breaches.
Tracey McDermott, the FCA’s director of Enforcement and Financial crime, said: “This is the first time the FCA has used its suspension or restriction powers to punish a firm for serious misconduct. In this case, it is a direct intervention by the FCA in the way the firm runs its business. The sanction is intended to send a message of deterrence to the rest of the industry, and serve as a reminder that the FCA takes systems and controls failings very seriously and is able to respond with sanctions that target the specific revenue streams of different types of business.”
The FCA’s disciplinary action in this case reinforces the importance of collating quality MI, embedding risk-focused systems and controls and encouraging a consumer-focused culture.”
The FCA found that, between 20 August 2008 and 30 April 2013, there were systemic weaknesses in the design and execution of the firms’ systems and controls and risk management framework. The FCA found that the firms’ failings were directly attributable to the firms’ cultural focus which viewed the ARs and individual advisers, rather than their customers, as the end consumer. This culture created an environment which allowed poor standards of business to continue for a significant period of time.
At its peak, the network was responsible for approximately 400 ARs and 500 individual advisers (CF30s), who gave advice to over 60,000 customers, including in relation to high risk transactions such as UCIS, pension switching and occupational pension transfers.
The Group was referred to the FCA’s Enforcement Division following a risk assessment in May 2012 and the FCA’s predecessor the Financial Services Authority (FSA) thematic review of firms’ practices in respect of the promotion and sale of UCIS, each of which raised serious concerns about weaknesses in the Group’s systems and controls and risk management framework. Charles Palmer, the Group’s CEO, was the subject of a previous Final Notice in 2010, relating to earlier failings at Financial and Investments.
Of significant concern to the FCA was the firms’ inadequate systems and controls relating to the recruitment, training, monitoring and control of its ARs and the firms’ compliance and file checking processes which did not adequately identify and assess risks. Were it not for the firms’ financial position, the FCA would have imposed a penalty of £12,589,134 on Financial and £621,583 on Investments.
The FCA recognises that the Group now has a new and more experienced Board in place which has engaged with the FCA and an external consultant to effect material changes to its systems and controls and risk management framework in line with an agreed remedial action plan.
The FCA has required the firms to conduct further Past Business Reviews (PBR) in relation to its pension-switching recommendations and its promotion and sale of UCIS. The ongoing PBRs may result in redress being paid to consumers.
Financial Group agreed to settle the case at an early stage of the investigation and therefore qualified for a 30% discount. Without the discount the recruitment ban would have been imposed on each of the firms for 6 months.