A year and a half or so into regulation it is only natural that some firms are starting to review their compliance arrangements and, if necessary, their authorisation status. From my own experience, at the Complete Network, we are getting membership enquiries from new entrants into the market as well as directly authorised (DA) firms wanting to switch to appointed representative (AR) status and AR firms wanting to switch their network. At the other end of the spectrum, some of our existing ARs feel confident enough about their own compliance knowledge and capabilities to be starting along the path of becoming directly authorised.
For those AR firms looking to fly the nest into DA status, and equally for existing DA firms who want to spend less time on Financial Services Authority (FSA) business and more time building up their own businesses, employing a compliance consultant is one strong option. However, whereas mortgage networks (as principals) are closely scrutinised and controlled by the FSA, mortgage and general insurance (MGI) compliance consultants have no official status currently and no controlling organisation that supervises and upholds standards. The FSA itself has no list of MGI approved compliance consultancies, although it has compiled a list of questions that those looking to employ such a consultant should be asking. This means anyone looking to employ a compliance consultant, or change the one that they already employ, must do some thorough homework before making their choice.
Regulatory obligations
It cannot be stated too strongly that, unlike the principal/AR relationship that exists within networks, a compliance consultancy has no official status and cannot be held responsible for the compliance of its clients. As the FSA puts it, ‘a firm cannot contract out its regulatory obligations. It – the firm – will remain responsible for ensuring sound compliance with the requirements and standards under a regulatory system, whether or not a compliance consultant has been appointed’. So, there we have it from the horse’s mouth – as a DA firm you are solely responsible for the quality of your own compliance.
Before moving on to the sort of questions that firms should be asking both themselves and any prospective compliance consultancy, it is important to remember that regulatory compliance is not a single bolt-on external system that can be applied to every sort of MGI firm.
Mike While, managing director of the training and compliance consultancy, NM2, says: “The key to good compliance consultancy is the consultant’s ability to understand how your firm works and where you want to end up and to tailor their compliance recommendations to your unique needs. While rules and guidance provide firms with parameters to transact business (although these are often difficult to understand) they should still allow firms to remain entrepreneurial/innovative. It is not acceptable for a compliance firm just to provide you with an ‘off the shelf’ manual which remains in a cupboard in your office. Any system built by a consultant must be adopted and aligned to your business practices as well as ensuring that you and your firm continue to meet FSA requirements.”
Questioning and selection
This sets the stage for the sort of questioning and selection process that needs to take place. The FSA’s own suggested list of questions can be found in the small firms section of its website, under general information/ frequently asked questions (No 20). This is a list for all regulated firms, not just MGI ones, and it covers three topics, which are broadly: who the consultants are; what they do; and their track record.
Under the first heading, firms looking to appoint a compliance consultant are urged to look at the experience of the consultant in their particular field, in financial services generally, and in the field of regulation. On the latter subject, it is suggested that firms find out about how the consultancy keeps up-to-date with regulatory and product changes. Qualifications and membership of trade bodies could also indicate a sound level of knowledge and practice. If, for example, the individual consultants are members of the Compliance Institute, and have gained its accredited qualifications, this would be one such indicator.
Turning to the services provided by the consultancy, and supporting Mike While’s views about using a consultancy that understands your business, the first thing a firm must do is to sort out what type and level of service it needs. For example, many firms may have used a consultancy to help them prepare for their original authorisation, which may have involved strategic consultancy about the direction of the business itself. Perhaps these same firms may now be looking for something more on the lines of using a consultancy for ongoing outsourced compliance support. On the other hand, firms may already have this sort of support and wish to take on more of the day-to-day compliance with regular strategic input from a consultancy.
Firms are urged to look at the way the consultancy runs its own business and whether it has adequate staff and resources to do what it says it will do – for example, during peak holiday periods. There is also the question of service levels and whether they should be specified within the contact. Costs, of course, are a crucial issue. Smaller mortgage firms are unlikely to seek the (very expensive) services of the larger management consultancies. However, when researching for an affordable consultancy service, they should be wary of consultancies that claim to provide a turnkey compliance service for a very low day rate (say £150). The sort of experienced senior level consultants that can do the job properly will be charging more in the region of £400-£500 minimum a day, depending on the type and level of service that is required. This may seem a considerable cost to a smaller firm, but expert compliance support can lead to other savings within the firm, for example the possibility of negotiating cheaper professional indemnity cover. To round off the selection process itself, firms would be well-advised to look for a consultant with good experience in the mortgage regulatory sector, ideally with a Mortgage Code Compliance Board (MCCB) background.
Having narrowed down the field, the next task is to reassure yourself about the track record of the consultants on your list of finalists, by checking references, integrity and reputation. Has someone you trust recommended them? Do they have sufficient professional indemnity insurance? Have any of their clients been subject to FSA action?
Technology advances
The practicalities of working closely with a compliance consultant, who will necessarily be involved at the core of your day-to-day business practices, need to be something that firms must be comfortable about. Fortunately, the rapid advance of technology is making possible a greater level of remote compliance monitoring complementary to the conventional examination of paper files and achieves greater efficiency at lower cost.
While says: “In the modern world, it is critical that compliance professionals are able to support intermediaries with simple and easy-to-use online systems, which can provide effective audit trails to support sales advice from initial contact and product sourcing, through to completion. These must be cost-effective and allow immediate action to be taken. Good systems will ensure monitoring is effective and allow the identification of issues before they arise and enable you to take action to remedy them before any chance of consumer detriment.”
Service level agreements
Employing a compliance consultant can solve many problems and leave firms to get on with servicing clients and earning fees. However, consultants are suppliers like any other, and if they don’t come up to scratch then the employing firm must either make sure they do, or make other arrangements. Appointing a compliance consultant is not the end of a journey, but the beginning. The firm itself never ceases to be responsible for its own compliance and should have in place an effective service level agreement as part of the contract and be able to formally review the consultancy’s performance at regular intervals, recording the results of the review. Even if the performance of the consultancy is exemplary, the firm’s own development may mean its individual needs for compliance support have changed and that a new arrangement is required. That’s when you have to start reading this article from the beginning again.
