Avoiding FCA Reprimand is a Big Job for Senior Management but Not Impossible

One of the biggest legal cases in the financial services sector recently, was the FCA’s decision to ban Charles Palmer, former CEO of Standard Financial Group Limited, a financial advisor network, from the field and fine him a whopping £86,691. Now this sounds scary, and it is, for Mr. Palmer, but it’s important that we emphasise that you do really have to mess things up to receive such a fine.

So, what did Mr. Palmer do?

The FCA found that Standard Financial Group Limited’s business model focussed on the financial wellbeing of the network’s appointed representatives (ARs) and registered individuals (RIs), rather than the end customer, and that this exposed over 60,000 customers to financial risk. This model allowed many ARs and RIs to continue working to poor business standards.

Standard Financial implemented a two-tiered internal licensing process which determined which products and services firms were allowed to advise on, but ultimately, did not enforce the license. In addition, when firms did not receive the stated license, there was no defined protocol in place to ensure that they were not allowed to continue advising on whatever they wished.

How does an entire network fall foul?

As the CEO and director, Palmer had a responsibility to ensure that those working within his network had been properly vetted, trained and briefed on company culture from the start, but the FCA found that most firms had not been required to meet any defined criteria before joining the network, apart from documentation such as bank statements and credit reports.

This allowed firms to conduct their business in any way they chose, and despite a short ‘pre-joining visit’, Palmer’s network did not conduct any rigorous assessment over the AR or RI’s business standards. In addition, the firms did not receive any future assessment on their advising once they had joined the network.

The FCA implemented a Skilled Persons Review, which found that Standard Financial’s recruitment procedures were insufficient. Assessments were based on how long the firm or individual had been active, and only those with less than two years’ experience in the sector received training. This training was found to also be insufficient and not even compulsory until February of 2012.

The advisers with more than two years’ experience were assessed through a form that they themselves had filled out, and these advisers were not obligated to receive objective assessment from the network before they began advising.

The FCA always offers chances

This was not the first time Palmer’s network had been under scrutiny by the FCA and in 2010, Standard Financial was fined £49,000 due to pension switching failings. The FCA continued to review the network until 2014, when it banned the network from recruiting new advisers.

Finally, in 2015, the FCA found Palmer to have provided insufficient evidence of improvement and thus implemented the £86,691 fine and lifetime ban from the profession. The FCA stated that Palmer’s business model was, ultimately, to blame, in that it knowingly allowed too much flexibility and freedom for advisers.

“This business model thereby increased the risk to underlying customers inherent in an adviser network, and gave rise to material risks to underlying customers, including the increased risk that the firms would be unaware of, or unable to prevent, ARs and RIs giving unsuitable advice or selling unsuitable investments.” – FCA website

It’s easy to see (and somewhat of a relief) that the FCA provided opportunities for Palmer to correct these issues, indicating that this case was more than just a costly mistake.

So, while responsibilities are high for managers, if you are conducting your business with honesty and integrity and are ensuring that all the appropriate regulations are being met, you shouldn’t have anything to worry about. Unfortunately, we can’t say the same for Standard Financial.

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