Compliance Digest - 21st June 2024

Welcome to this week’s Compliance Digest.  Here is a summary of some of the issues that have come into my industry news feeds this week.

• A review of the FOS approach to complaints

• A fully joined up advice process

• Two arrests connected to suspected illegal £1 billion cryptoasset business 

• FCA keeps trading apps under review over gaming concerns

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Fairness over formulas: the UK Financial Ombudsman's approach to complaints

There has been a lot written about complaints brought against Carey Pensions – now known as Options UK Personal Pensions LLP.  Carey Pensions operated a SIPP as an administrator on an execution only basis, meaning that it executed the sale and investment instructions from clients without offering regulated advice because it was not authorised to do so.  A search of the FOS decisions reveals 359 results in a date range from 1st January 2021 to date. 

A recent Court of Appeal judgement confirmed that the FOS may take a broad approach in considering and resolving complaints.  The judgment reinforces that it may consider both legal and non-legal standards, including the FCA's Principles for Businesses, contractual principles, statute, regulatory guidance, and best practice.

Key points

• When making a fair and reasonable decision considering all the circumstances of the case, the FOS may take into account legal and non-legal standards.

• Although the FOS must provide a rationale for a decision in a way that is sufficiently clear to enable it to be scrutinised (and potentially challenged), it is under no obligation to follow a formulaic approach when setting out what was considered in making the decision.

• The bar to establish that the FOS has made an irrational decision continues to be high, and mere disagreement with an ombudsman's conclusions without substantial evidence of irrationality is insufficient for a successful claim.

The law firm Herbert Smith Freehils has published a summary of the case and the appeal by Options UK Personal Pensions LLP, which it refers to the firm as the Claimant.  The Ombudsman's Decision found that the Options UK should have conducted due diligence on the Spanish unregulated introducer and the investment and should not have accepted the Customer's application based on the information available at the time.

The precedent is that the SIPP operator owes the client a duty of care to carry out due diligence on the introducer of the business and the business itself before accepting the investment.

If your firm receives a complaint that you would like a third-party review, please contact Compliance Matters UK Limited for support.

A fully joined up advice process

The Consumer Duty has had the effect of focusing advisers on the end-to-end client journey from the initial factfind through to implementing the financial plan.  But the client journey does not stop at the implementation stage.  Once the financial plan is in place, many clients will need ongoing annual reviews to ensure that their plans stay on track and are flexible enough to cope with changes in personal circumstances and the impact of economic events both domestically and globally.  If your advice is linked to a managed portfolio service (MPS) you are going to need to be even more efficient when it comes to rebalancing portfolios that are subject to a discretionary mandate.

With clients that expect an increasingly agile service and a regulator that will want MI digitally and, sometimes, at short notice, the way you manage and maintain your back-office system will be key to efficient and effective client relationships and meeting the demands of the FCA.

Gone are the days of completing a paper factfind with numerous paper-based updates and scanning them to the back-office.  Firms are going to have to embrace the factfind within the back-office system and ensure that it is updated after each client interaction.  Many of these systems are able to record soft facts and you will need to work with the software provider to get the best out of your chosen system and find out which software interacts with it seamlessly, be it the ATR software, your cashflow analysis software or other systems you use.  It is now time to rethink advice journeys and move beyond simple integrations, to create a fully joined-up process from the initial fact find through to final implementation and ongoing client service.  Consider the Amazon customer journey, in just a couple of clicks you can select a product, place an order, and get it delivered the next day.  I am not suggesting that regulated financial advice is akin to the delivery of consumer goods, but it illustrates how effective, joined-up customer journeys make completing regular activities quicker and easier for users.

To make this type of streamlined process happen in financial services, we need all the parts of the back-office to work together seamlessly.  As I have illustrated, there should be no need to switch between multiple systems to access key activities or for the time-consuming admin and avoidable data errors created by the need to rekey data in different places.

With the Consumer Duty requirement to deliver fair value to clients, creating a more joined-up adviser journey to remove unnecessary costs, errors and delays has become even more important for the advice profession's future success.

If you would like Compliance Matters UK Limited to review how you use your back-office system and suggest how you could streamline your systems, please contact us.

Two arrests connected to suspected illegal £1 billion cryptoasset business 

In a press release the FCA has confirmed that working with the Metropolitan Police Service, it has conducted an operation to arrest 2 individuals, aged 38 and 44, suspected of running an illegal cryptoasset exchange.  Cryptoasset exchange providers must be registered with the FCA and comply with the UK money laundering regulations in order to operate legally in the UK.

The FCA has been the anti-money laundering ‘supervisor’ for crypto asset businesses in the UK since the start of 2020.  Latest figures show the regulator has received 347 applications to register of which just 47, or 14 per cent, have been accepted.

The FCA has consistently warned that investors should be prepared to lose all their money if they invest in crypto, arguing they are unregulated and high-risk.  In May, the Chinese ‘bitcoin queen’ Jian Wen was jailed for six years for a £3billion crypto fraud.  The former Chinese takeaway worker was found guilty of money laundering.  She came to the police’s attention when she tried to buy a £23.5million Hampstead mansion.

In the Compliance Digest published on 7th June, I discussed the importance of being aware of the regulatory perimeter found in PERG.  I have also written about the FCA’s Financial Crime Guide (FCG) both found in the Regulatory/Registry Guides block of the FCA Handbook.

If you would like to discuss how the regulatory perimeter impacts your firm or if your AML/CTF systems and controls may be tightened, please contact us.

FCA keeps trading apps under review over gaming concerns

In another press release the FCA has confirmed that in an online experiment with over 9,000 consumers, the it found that digital engagement practices (DEPs) used by trading apps, such as push notifications and prize draws, can increase trading frequency and risk taking.  It also found evidence that DEPs can have a larger impact on some subgroups, including those with low financial literacy, women, and younger participants (18-34).

In an online experiment with over 9,000 consumers, the FCA tested 4 digital engagement practices (DEPs) looking at their effect on trading frequency and investment risk.  The DEPs we looked at were:

• flashing prices

• push notifications

• trader leaderboard

• points & prize draw

The FCA’s key finding is that DEPs can lead to changes in both trading and frequency and investment risk.  It also found some evidence that DEPs can have a larger effect on:

• those with lower financial literacy

• women

• participants aged between 18-34

This suggests that firms and regulators should continue to closely scrutinise the effect of trading app design features on consumer investment decisions, especially in light of the Consumer Duty.  The full Research Note can be found here. 

How can we help?

It is important that you have robust policies and procedures to address complaints should they arise.  If you would like Compliance Matters UK Limited to assist with any ongoing complaints or review your compliance systems and controls schedule a free, no-obligation consultancy call with us today. 

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