The FSA has undoubtedly ramped up its enforcement action on firms straying from the boundaries being set by the watchdog. According to city law firm Reynolds Porter Chamberlain, the FSA issued a record number of fines in 2009/10, eclipsing the record levels of the previous year by a whopping 21%. In total, the report suggests that the regulator handed out penalties totalling £33.1m over the course of the year with eight fines of more than £1m taking place.
It is evident the FSA is certainly delivering on its promise to get tough, which underlines the message that it will not tolerate any shortfalls. This follows the announcement in the regulator’s new business plan that its approach to supervision will be much more intrusive and enforcement much more prolific. The FSA has stated that it will be adopting a new stance of ‘taking a view’ of the risk that a firm might pose: even if it turns out to be a wrong view, the firms will be challenged.
Looking at sale and rent back (SARB), this is obviously an area of the market new to the FSA’s regulatory umbrella and one which inevitably will come under great scrutiny. Indeed, only recently, a couple of SARB firms that we work with have had Treating Customers Faily (TCF) visits which comprised detailed inspections lasting almost two days. It was certainly not a case of a swift, random file-checking visit followed by a brief interview. It was very analytical, and I can only emphasise that preparation and knowledge of what was expected were absolutely crucial to their success.
In terms of the actual schedule for a visit, a firm will normally be given two weeks’ notice for the visit together with a list of areas requiring discussion or inspection. These fall under three broad headings:
- Overview of the firm – history, business strategy, financials, governance, compliance arrangements and controls, thoughts on the full FSA regime.
- SARB sales process – staff competency, recruitment, reward, customer advertising, business lines/use of intermediaries, controls on high pressure selling and advice (including the use of external advisers).
- Protection of customers’ interests – right of occupancy, beneficial interests, asset disposal, unauthorised SARB operators and product quality.
The FSA generally requests that all senior management who are responsible for the performance of regulated activities are available for the duration of the visit. In terms of our role in the visit, we undertook a full compliance audit of the company using proven methodology covering overall FSA requirements.
We aligned the results of the audit with the areas required by the FSA to produce a gap analysis. This provided a clear focus for us and the firm with the output being an action schedule to be completed prior to the FSA visit.
Our preparation (with the firm) concentrated on two key areas. Firstly, mapping the sales process. This allowed us to ensure all the customer touch points were risk assessed and controls put in place to ensure customers were being treated fairly. This included pre-sale disclosure documents, comprehensive factfinds and construction of a conflicts of interest control log, together with a comprehensive TCF strategy/evidence log and gap analysis.
Secondly, developing the firm’s Training and Competence Scheme, encompassing the needs of the Approved Person and all customer-facing staff.
When analysing the feedback the FSA acknowledged individual firms’ ability “to show that senior management is engaging with its regulatory obligations and that a regulatory framework is in place for the fair treatment of customers”. While acknowledging this, the FSA also made specific reference to the following in relation to all firms: the level of understanding of regulatory matters and obligations; the engagement of external compliance consultants is seen as a positive move, (however, this should not be at the expense of the firms understanding and delivery of its regulatory obligations); and the protection of customers’ interests on a SARB agreement.
Firms need to ensure that policies and procedures are drawn up clearly identifying how customers’ interests are protected under SARB agreements including the following areas:
- Pre- and post-sale disclosure
- Advice
- Typical discounts and other fees and charges
- Customer beneficial interests and other key features and restrictions
- Rent policy
- Tenancy details
- Valuations
- Customer options once the initial contractual period of tenancy expires
The FSA views the development and delivery of an effective training and competency scheme as critical in underpinning a robust TCF regime in a firm.
It is fair to say that SARB firms, or other firms operating in the mortgage market, facing an FSA visit without any previous experience face an uphill task as this can be a hugely time-consuming and very detailed process that requires a larger degree of understanding and expertise.
Of course, it is not an FSA requirement to engage a specialist compliance support company and firms with specialist compliance departments can certainly accommodate such a regulatory appointment but it is important to emphasise the wealth of support and expertise out there, especially in light of the move to an even tougher regulatory regime.
Claire Wilkinson is retail director at Compliancy Services
