Disciplinary danger for small brokers failing to prepare for FCA assessments

The majority of small brokers risk falling foul of disciplinary action or further FCA scrutiny because they are not prepared for an assessment by the regulator, a compliance expert has warned.

The FCA says it wants to see how smaller firms identify and take action to reduce risks to their business, but those deemed to pose a significantly high risk will be subject to further supervisory visits or disciplinary action.

For the past 18 months small firms across the UK have been selected for telephone, face-to-face and online assessments, dependent on their size and the types of business they place.

But under the new regime firms have been split into C1-C4 categories, which determine the type and degree of supervision that will be used, based on a firm’s retail customer numbers and potential impact on the market should it fail.

The majority of brokers fall into the C4 category.

Of the C4 firms assessed so far, the typical issues found by the FCA included: no formal assessment of competence and inadequate continuing professional development records to insufficient regular reviews of business, financial crimes risks and ineffective process of staff recruitment.

Branko Bjelobaba said: “Some brokers will have done a substantial part of the work, but most still have to figure it out.”

“They have to acknowledge the fact that they have to stand back and look at what they need and see if they have done enough compliance and if they haven’t, they need to get a move on.”

The other types of firms that have been assessed by the FCA include investment firms, independent financial advisers and fund managers.

During the FSA era, the supervisory process for firms was more relaxed, with firms categorised by either big or small.

But under the new model, much larger firms in the C1 and C2 category have a nominated supervisor and are likely to experience a highly intensive level of contact with the regulator.

C3 and C4 firms are supervised by a team of specialists who will examine their business models.

They are also subject to the ‘touch point’ contact at least once with the FCA during the four-year cycle, to determine how it runs its business.

Bjelobaba said the senior management in smaller firms should also have more than a basic understanding of the FCA regime, as well as compliance within their company and, along with board members, should understand all the risks of their business.

“Compliance is demanding. It will take up a huge amount of their time. You cannot pretend to do it well if you do not do it well,” he added.

“If you are apathetic towards compliance and risk how can you run your business properly?”