Quality control: can small firms keep compliance in-house? As regulatory demands on advisers intensify, Maria Merricks finds out whether it is realistic for smaller businesses to take care of their own compliance affairs.
The biggest regulatory overhaul ever seen in the financial advice industry, the Retail Distribution Review (RDR) has led the majority of advisers to revaluate their business models and adapt crucial aspects in the day to day running of their firms. With just six months to go until its implementation, such a task has left many with little time to keep abreast of other regulatory changes.
In the past year or so the industry has been hit with a tidal wave of new developments: Basel III, Mifid II and FATCA to name just a few. As well as taking time to understand and interpret each new requirement, firms are also expected to continue with traditional day to day compliance affairs such as file audits and risk management.
But for the smaller firms and sole traders out there, the task is becoming increasingly difficult to keep under the same roof.
- “The main challenge facing smaller firms is competing priorities,” says Gillian Gallacher, managing director of Gem Compliance Consulting.
- “The sheer volume of documentation changes and other things to keep up to date with now makes the responsibility a full time role.”
So just how realistic is it for smaller firms to keep compliance in-house? We take a look at some solutions.
Outsourcing
According to Kelita Crocker, head of compliance at SimplyBiz, the repercussions of getting it wrong can be devastating.
Outsourcing the responsibility to a service provider can go some way towards freeing up time for advisers to concentrate on what they do best – providing advice to clients.
SimplyBiz, for example, provides regular updates on changing regulations. Advisers will also benefit from an online compliance manual and an array of documents and templates, from disclosure documents to suitability reports and fact finds.
- “We have in-house compliance and technical specialists to assist with complex queries, as well as in-house file checking specialists who can conduct checks on everything from a term assurance contract to an occupational pension transfer. We also offer compliance visits with specialists,” says Crocker.
Eldon Financial Planning benefits from the outsourced approach. Director Joss Harwood recognises only too well how broad and time consuming the process can be, even though her company consists of just six employees.
Eldon uses the support of threesixty which offers a similar service to SimplyBiz.
- “We could not hope to remain compliant without the constant stream of information filtered to be appropriate to us. This strategy gives us the opportunity to ‘fine tune’ what we do to ensure we meet all our obligations but within the way we want to work,” says Harwood.
Remain in-house
At the other end of the spectrum there are advisers adverse to external support.
For Harry Katz, managing director of Norwest Consulting, keeping compliance in-house is not only realistic but essential. His concern is outsourcing the responsibility could lead advisers to lose touch with the issue.
- “No matter what, you carry the can if there is a breach and the outsourced consultant will just walk away whistling,” he says.
Indeed, in its factsheet on using a compliance consultant, the FSA stipulates:
Firms are responsible for ensuring compliance with the regulatory system, whether or not they use a compliance consultant. Remember that using a consultant does not guarantee compliance. You cannot contract out your regulatory obligations and small firms need to meet our principles just as much as any other firm.
As Katz points out:
- “If it is down to you and your pocket, doesn’t it make sense to keep the process as close as possible?”
It is a risky choice. Considering the FSA’s responsibility over such a wide range of business models – from sole trading IFAs to multinational banks –a structured list of regulatory requirements for just one type of firm does not exist.
However, for those intent on keeping compliance affairs in-house, Gallacher points to the regulator’s ‘small firms’ part of its website as a key starting point for guidelines.
Another handy hint is to keep an eye out for compliance forums, she says. These are held across the country and, for the sake of an hour three or four times a year, will provide advisers with an opportunity to pick up best practice ideas from their peers.
Meanwhile, Katz is keen to emphasise the importance of FSA seminars.
- “If the FSA notifies me of one, I do not regard it as an invitation, I regard it as a summons,” he says.
Tailor-made support
For those unmoved by either of these propositions, there is another solution.
Tailor-made support services silence those critics wary of generic, off-the-shelf, one-size-fits all propositions but also calm the fears around going it alone.
There are many independent compliance consultants who will work on an ad-hoc basis, charging a one-off fee for support materials or health checks, for example. This approach is ideal for those wary of giving up all compliance responsibility.
For those firms that find themselves constantly “firefighting” compliance affairs, ad-hoc support is useful just to get back on track, says Gallacher.
- “Once you get it back on track and are able to look forward, you can take the task back in-house again,” she says.
Lee Werrell, managing director of CEI Compliance, advocates a pre-emptive strike before the FSA comes knocking. His service entails going into a firm, running a health check and constructing a “fitness regime” to correct the problems he finds.
- “A lot of people who try to keep their compliance in-house do not have much experience of the outside world in terms of what other people in the industry are doing. The main value add an independent consultant like me can bring is a wide and in-depth knowledge of current best practice,” he says.
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