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Bridging the gap between HR and compliance


The FSA has developed very big teeth indeed. A quick look at recent enforcement will tell you that and also reveal that issues around conduct, treating customers fairly (TCF) and training and competence are behind a great deal of it.Neil

Sadly this appears not to have been taken on board by many businesses and in particular firms within the wealth management sector. The recent FSA ‘Dear CEO’ letter dealt with apparently widespread failings regarding suitability and quality of client advice. The majority of firms – it appears – are still not addressing the root and branch issues that are required to guarantee compliance with TCF standards. One only has to look at the recent failings at major financial institutions to see that the industry has a long way to go.

For those responsible for ensuring regulatory standards are met in terms of training and competence, ethics, conduct and TCF – and primarily they are Compliance and HR – the reality is that without total support and commitment from the top there is little chance of building a performance and competence-based TCF culture that is up to the FSA’s expectations.

A top-down approach to assessment
The FSA – knowing this – has clearly signalled its intention to adopt a top-down approach to assessment with regard to conduct, TCF and also training and competence issues. And yet there are many Compliance Officers and indeed HR Directors who still struggle to make their voice heard or to justify the business case for increased investment and focus in these areas. Whilst they are different areas – requiring individual policy and process in their enforcement and encouragement – they have key features in common:

1. The FSA is looking for real commitment and a cultural shift – not just box ticking
2. Key to all is the setting of required standards and expectations and that staff are fully aware that these issues – as much as revenue and profit generation – are key to the successful delivery of their roles.
3. Assessment against such core competencies – and clear performance benchmarks – is essential.
4. Rigorous record keeping is equally core to effective delivery.
5. A firm must demonstrate its commitment to rewarding good performance in these areas and to root out those who simply refuse to deliver or even recognise their importance.

All of this requires a firm and its senior management to invest time, commitment and capital in delivering best practice.
They must embrace and embed a compliance culture and put in place rigorous systems and processes to ensure this is delivered by individuals through training, objective setting, supervision, monitoring and assessment. They also need an electronic recording and monitoring system to provide an audit trail to prove they are doing this, should they be required to do so.

‘Embrace and Embed’
The FSA want to see a commitment from the top down to embrace a ‘compliance culture’. This starts with stated policy and process but then requires the embedding of core competencies and standards- of performance, competence and behaviour – into the required deliveries of every Advisor in the firm.

There needs to be a clear intention of making these competencies and standards core to the reward and remuneration of those individuals. It is also about a fundamental cultural shift towards a TCF driven culture where competence, conduct, integrity and suitability are at its core.

All of this must be a cornerstone of training and CPD plans, policy and process.

Keeping Records
The FSA requires clear and thorough assessment of individuals, training and competence plans that are monitored and followed through and a transparent audit trail with records all in one place.
All of these require investment, both in the delivery and management of these required processes and in an IT system to record them. Scattered spreadsheets and paper files just won’t do the job anymore.The FSA defines responsibilities and protocols for training and competence records. For example, both firm and individual must ensure that Advisers achieve threshold competence and qualification level under the new RDR guidelines.

Ethical Conduct and Integrity
At the front-end of financial services there is a fine balance to be struck between motivating employees to be productive and profitable and encouraging reckless behaviour.
The challenge for both HR and Compliance departments of such businesses is getting senior managers to understand the business case for being ethical and for acting with integrity. This needs to go beyond purely the moral argument for ethics and integrity to establish a P&L argument to support them. 

The key drivers of this argument should be:
1. That this is no longer an option – to stay in business depends on the FSA being satisfied that ethics and integrity meet their ever higher standards
2. There is a clear reputational and financial risk in non-compliance
3. There is a clear competitive advantage for a firm that visibly displays ethical behaviour and approaches markets and customers with integrity. The reputation of the Financial Services sector has never been so low – potential customers will undoubtedly gravitate to those companies perceived to be outperforming the dismal expectations many of them seem to have.

Treating customers fairly
Since the FSA published in its 2007 paper what it considered to be the key drivers of TCF, it has significantly hardened its attitudes towards firms that simply aren’t committing to these. Firms are expected to be able to evidence that they are committed to a TCF culture.

Once again, recruitment,training and competence were put at the heart of TCF as a key driver. The others were leadership, strategy, decision Making and controls.
They are of course heavily interdependent, however recruiting the right people and ensuring they reach and maintain the highest standards in all of these areas – not least competence and conduct – is core. In this area the FSA has identified five essential areas for attention:recruitment; training; continuous development; feedback; and managing performance.

For each of these, there is a range of positive and negative indicators that firms should – and the FSA will – look for to identify where the firm’s policies and their implementation have failed to support a TCF culture. For example, a contra indicator to a positive culture that encourages continuous development would be where little interest is shown in staff development and individuals are left to decide their own training needs.
Anyone with responsibility for these areas is encouraged to review the FSA’s document and consider where policy or practice does not support TCF.

Suitability under scrutiny
One of the key outcomes – suitability – is equally under scrutiny by the FSA and it has been clearly signposted that the FCA will put this at the centre of Conduct Assessment for wealth management firms.

Having firm policy and process, systems and controls in place to ensure this, are – on their own – not enough. The firm must be able to provide clear evidence and an audit trail to support the fact that this is encouraged. It must be supported by the culture of the firm and central to any training. Such controls should also be critical to performance assessment and core to the delivery of client facing roles.

In all of these issues surrounding training and competence and conduct, the FSA and the future FCA have made it very clear that this will continue to be a key area of scrutiny.Writing ambitious policies and implementing processes are worthless if they are not embedded in the culture of the firm and made central to the training and competence, delivery and performance management policies and processes. Firms however continue to fail to invest in the training and systems required for such simple delivery, monitoring and record keeping.

A hungry regulator awaits them.

Neil Herbert, Director, HRComply.



Global Banking & Finance Review


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