“Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.” Not my words, but the opening lines of the classic film Ferris Bueller’s Day Off starring Matthew Broderick. Why, you might ask, am I quoting this iconic 80s film? In my mind it captures nicely the pace of change that’s currently facing the financial services sector. Martin Wheatley sums this up in his introduction to the Journey to the FCA (Financial Conduct Authority) where he emphasised that “things need to change: industry and the regulator need to rise to the challenge of that change”.
The menu of regulatory change to tackle is not small: the FCA’s approach to product governance and intervention; the lower risk threshold being applied to financial promotions; the increasing importance of culture, the FCA’s new supervision model, lessons and good practice from final notices, the Mortgage Market Review, the Financial Ombudsman Service publication of all ombudsman decisions – I could go on. In isolation, each of these is manageable; the challenge, however, lies in the totality of this change, particularly for individuals and departments with oversight across products, distribution channels and businesses. Ensuring a robust second line of defence is key.
When talking about the role and expertise of compliance teams, commentators refer to the fact that compliance needs to be independent and robust. This is certainly true, but the challenge goes beyond this. To do the job effectively, compliance staff must be technically savvy and be up to date with industry challenges. How do your compliance teams keep up-to-date? Are they keeping pace with the businesses they support, for example: are they required to have qualifications equivalent to Level 4? Is there a training and competence (T&C) requirement for your compliance resource? How does your firm ensure competence within your compliance teams so as to ensure an effective second line of defence?
Regulatory expectations in this area:
- Principle 2: conduct business with due skill, care and diligence
- Principle 3: take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems
- Principle 6: pay due regard to the interests of its customers and treat them fairly
This last principle has special relevance to staff competence as it ties in closely with the management culture of a firm and the ethical behaviour of its employees. The Financial Services Authority’s (FSA) Treating Customers Fairly (TCF) review of front line work highlighted that the absence of good T&C procedures will inevitably have an adverse effect on the quality of the service that a firm provides. The same must be true for the quality of service provided in the second line.
We all work in a changing regulatory environment. The need for staff to keep pace with this change is of paramount importance if they are to discharge their responsibilities effectively. There are roles to play here for firms’ senior management, who need to ensure that their compliance teams are not providing false assurance and that independent and robust arrangements are in place. A compliance effectiveness review may well assist senior management in assessing and determining next steps in this journey.
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