Out-Law News 1 min. read
27 Jan 2020, 11:52 am
Elizabeth Budd, an expert in financial services regulation at Pinsent Masons, the law firm behind Out-Law, recommended companies carry out the review after the Financial Conduct Authority (FCA) said that "overall standards of governance" in the industry "generally fall below our expectations".
In two 'Dear CEO' letters published on 20 January, the FCA highlighted the impact of governance on customers.
In the first of its letters, the regulator said: "Far too often, the appropriateness of investment products for investors is not adequately considered. In particular, this presents a significant risk of harm where high risk alternative investments are made available to less-sophisticated investors. CASS (Client Assets Sourcebook) oversight and controls are not always robust, creating a risk of loss to client money and custody assets. Weak systems and controls can lead to the risks of market abuse, other types of financial crime and harm or disruption to market integrity not being effectively mitigated."
The second letter stated: "Funds offered to retail investors in the UK do not consistently deliver good value, frequently due to failure to identify and manage conflicts of interest. Inadequate investment in technology and operational resilience has led to deficient systems which could cause harm to market integrity or loss of sensitive data."
Budd said the letters were the latest in a series of communications from the FCA.
She said: "Whilst the regulator's assessment of governance is retrospective and things should have been overhauled as part of the introduction of the senior managers and certification regime (SMCR), nonetheless asset managers will be doing a detailed review of their governance and a bottom up top down analysis. A similar forensic analysis is also necessary in respect of individual products. Each product needs to be monitored throughout its lifecycle."
Alice Bell of Pinsent Masons said firms need to go beyond boilerplate compliance manuals and documentation to meet the FCA's requirements on governance.
"Firms are expected to demonstrate they are implementing rules mindfully and robustly, with due consideration to the FCA’s underlying policy, the integrity and stability of the market, and customers’ interests," Bell said. "The FCA expects firms to engage to assist with industry-wide improvements and, where there are failures, the FCA has made clear it will take enforcement action."