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FSA has its beady eye on DA firms

The regulators keep tabs on directly authorised firms in many subtle ways so this should not be seen as a soft option compared with appointed representative status, says Bill Warren

I frequently use speeches by Financial Services Authority spokespeople as the subject matter for my columns and this is no accident. Speeches are a good source of detailed information and explanation and can give an insight into the focus of the regulator. They are also intended to be taken note of by the regulated community in general, not just those attending the events at which they are delivered.

The headlines and press releases concerning FSA speeches only skim the surface and the content of the speeches is where we can find the interesting stuff. As we have been reminded (see last week’s column), mortgage and general insurance firms need to become better at engaging with the FSA’s communications, and speeches are included in this communications mix.

Small mortgage and GI firms need to sit up and take notice of the speech made recently by Stephen Bland, director of small firms at the FSA, in which he set out to dispel two myths – first, that small firms are so numerous and insigni-ficant that they lie beneath the FSA’s radar and second, that appointed representatives are leaving the more rigorous supervisory regimes of networks in droves to enjoy the less onerous FSA supervisory regime meted out to smaller directly authorised firms.

Regarding the first point, smaller DA firms that calculate the odds of being visited by the FSA as too long to worry about may be interested to learn about the numerous ways in which they are already being monitored.

Bland explains the FSA’s approach as concentrating on giving help to firms that want to run their businesses profitably and compliantly, and bearing down on firms that are not interested in meeting FSA standards. The latter sort of firms – which are more likely to receive visits – are identified by collecting data through a number of channels.

First, there is the Retail Mediation Activities Return that every firm must submit twice a year. This information is overlaid with a range of other data and intelligence. Sources for this data include product sales data supplied by product providers which includes the products sold, the brokers involved, the methods of selling and customer information.

Additional external information comes from the police, Revenue & Customs, the Department of Trade and Industry, other law enforcement agencies and whistle-blowers, together with the Financial Ombudsman Service, the Office of Fair Trading and other regulators at home and abroad. Internal FSA information is sourced via firms’ contact centres, customer contact centres and project work including mystery shopping.

More recently, the regulator has worked with the Council of Mortgage Lenders to introduce a whistle-blowing scheme for lenders and brokers that has already resulted in 136 cases being pursued following information from 25 lenders leading to 34 enforcement referrals. In light of all this monitoring, there surely cannot be any firm left that still believes it is not on the FSA’s radar.

Bland dismisses the migration of AR firms to DA status as folklore. In the first three months of 2007, the number of AR financial adviser firms rose by more than 150 while in the past year, in the mortgage and GI sector, the number of DA firms fell by 9% and the number of ARs rose by 11%.

Bland points out that in contrast to the folklore, this could indicate that small firms – becoming aware that their processes are under the FSA’s direct scrutiny – are seeking the compliance support that networks among others can provide.

Statistics are never as clear cut as they seem and no doubt this apparent trend towards AR status contains a number of firms that have opted to switch status. Two-way migration is bound to continue as firms adapt their business models as their circumstances change.

The message here is that firms should not change status for the wrong reason – i.e. believing that DA status is the soft option. Whichever way firms decide to go, it is important that they weigh up the costs, benefits and responsibilities involved.

With the trend undoubtedly being towards firms adopting AR status and with a wide choice of networks available, firms must understand what sort of network support they need and then do enough research and analysis to ensure they choose the most effective option at the best price.

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