ADVANCED

Regulatory Theme Assessments

The Financial Conduct Authority is continuing its predecessors emerging focus on thematic reviews and focused inspection visits. High level regulatory oversight based on governance and systems and controls has been found wanting, and whilst these remain important and central to relationship where the firm has a nominated supervisor, the majority of firms will be part of what FCA terms a “flexible portfolio” subject to event-driven and issue based review.

The advantage for the regulator in this “pic ‘n’ mix” approach, is that regulators can become relatively specialised in their area of review, they import “best-practice” standards from the firms that form the initial sample of their review, issue a statement or consultation on their industry observations and apply those standards, identifying weaknesses or apparent shortcomings in a second wave of reviews. Where weaknesses are identified, the regulator will likely assume failures of systems and control and could seek remedial action or even commission a skilled person review.

One advantage for regulated firms is that the FCA normally trails heavily the areas or risks it plans to focus on, or a thorough and continuing risk assessment should identify areas that the firm considers require more intensive review.

AML

The UK regulatory environment places significant emphasis on the control and prevention of money laundering. The FCA will continue to use thematic reviews and targeted visits to test how the industry is improving practice following recent supervisory work and enforcement action, which found serious deficiencies, and will continue to make examples of firms who take unacceptable risks.

Cordium has undertaken thematic reviews of AML systems and controls and detailed AML control testing across investment management, private equity and brokerage environments. We can benchmark your firms operating practices against regulatory expectations and our experience of industry practice. We can provide advice and assistance establishing or improving operating AML procedures based on the day to day compliance assistance and training we provide to over 200 regulated firms.

Click here for a case study of an anti-money laundering process assessment that we carried out.

Client money and assets (“CASS”)

CASS has always been a key regulatory risk but the financial crisis and liquidity and solvency concerns within financial services firms has led the regulator prioritise this highly complex and demanding area of rules. The regulator’s work has revealed widespread mis-understanding and application of the rules within regulated firms and their auditors. The pendulum has swung to a point where minor and trivial indiscretions are required to be reported to the regulator, with judgement being the preserve of the regulator alone.

Cordium has undertaken numerous independent reviews of firms compliance with the CASS rules, supporting and helping firms understanding and interpretation of CASS. We have assisted investment managers, broker-dealers and a leading UK transfer agency with reviews of their client money and asset procedures, prepared CASS monitoring programmes for independent assurance, designed CASS reconciliation tools and prepared CASS control and reconciliation procedures.  Cordium has a number of experts in the CASS rules, CASS resolution requirements and has regular dialogue with industry bodies.

Click here for a case study of an independent CASS review we carried out for a global asset manager.

Conduct

As the name suggests, the Financial Conduct Authority will increase its focus on the behaviour and standards adopted by both Retail and Wholesale firms. In fact, the FCA promises a renewed and systematic focus on wholesale conduct issues. The FCA believes that activities in retail and wholesale markets are connected and that risks caused by poor wholesale conduct can be transmitted between them. It no longer accepts that there are some categories of relationship it should have less of an interest in because the sophistication of the parties enables them to look after their own interests. These risks require a more assertive and interventionist approach when supervising wholesale activities.

Cordium has considerable experience of conduct matters in both the wholesale and retail sector. Our work extends beyond investment managers – we have advised specialist service providers in the retail sector such as host approved corporate directors (“ACD’s”) and evaluated derivative non-advised sales processes at a leading UK retail bank.

Conflicts of Interest

One way the FCA has sought to approach conduct issues is the recent review of Conflicts of Interest in investment management firm. The regulator signalled a new approach with firms, first by writing to certain firms requiring their boards to practices and systems and controls met the standards the regulator expects and then by publishing the request and setting the standard that all firms benchmark their arrangements against FCA expectations at board level.

Cordium has worked with long only and alternative managers identifying conflicts of interest and establishing control frameworks and escalation procedures. We have conducted in-depth reviews of conflicts of interest arrangements at firms and have an in-depth conflicts of interest review programme based on the regulator’s recent work. This work shows that long-standing conflicts of interest issues have not been resolved by the industry, which increases the risk of further and more robust regulator intervention.

Click here for a case study of a governance and conflicts of interest review that we carried out.

Governance and Risk

Governance and risk remain important to the FCA but the regulator’s focus is towards the substance of the effectiveness of the governance arrangements in ensuring good regulatory outcomes, as opposed to the form of the governance structure. There will be a focus particularly on product governance, how firms design, operate and sell products, whether there is sufficient product oversight and monitoring of practical outcomes for consumers and whether the distribution strategies are appropriate.  The FCA believes that the assessment of governance and culture will be crucial, as these are key factors that drive whether a firm treats its customers fairly and can achieve proper consumer outcomes. Cordium has undertaken project work for the FSA (now the FCA), focusing on governance, senior management capabilities, management of conflicts of interest and board effectiveness.

Prudential

Cordium is a leading provider of financial regulation and capital adequacy advice and consulting within the investment management sector. Working with colleagues from our Financial Accounting team, we undertake internal capital adequacy assessments (ICAAPs), define and establish liquidity policies, provide capital adequacy and regulatory reporting training and undertake capital adequacy and reporting assurance reviews.