Table Of ContentButterworths
Financial Services
Compliance Manual
Neville Russell
Chartered Accountants
Butterworths
London
1988
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INTRODUCTION
The Financial Services Act 1986 (subsequently referred to as FSA) is one
of the most comprehensive pieces of investor protection legislation to be
enacted anywhere in the world. It arose out of the Gower Report set up
following a number of well publicised investment scandals in the late
1970s and early 1980s. The Act had a long passage through Parliament
and came out in a substantially different form to that in which it entered.
The subsequent problem of interpretation of the Act has exercised the
minds of a number of key bodies set up to administer and police its
provisions and full implementation of all the procedures has been
deferred on numerous occasions.
It is a body of legislation and regulation that imposes on the practitioner
a comprehensive and formidable array of controls and procedures to
protect his client, who in most cases is still blissfully unaware of the
protection he has. The Barlow Clowes affair has probably made the
general investment public more aware of the existence of the Act than
any of the publicity produced around A-day (29 April 1988).
The practising accountant who wishes to provide a comprehensive
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service to his client has to make a basic decision - does he wish to give
investment advice? If he answers yes' then he is committed to
implementing in his practice some form of internal control to ensure
compliance with the Act. If he answers 'no* and becomes simply an
introducer he may be turning away a valuable additional source of
business. This manual has been produced to help those who have
answered 'yes' and it may be that those who answered 'no' will be
encouraged to think again. The manual was originally produced for a
firm with over 70 partners and 20 offices, some of which carried out little
investment work; others of which had a substantial involvement in that
area and saw it as a means of developing other work, particularly in the
tax area. You will not be able to take the manual and implement it
without alteration into your firm, but it should provide you with a very
substantial basis for your own manual. The remainder of this
introductory chapter, which does not form part of the manual, will explain
the rationale behind the manual, the stages in its production and in its
implementation, so that you will be able to adapt its provisions more
easily to your own practice.
Institute of Chartered Accountants
The Institute of Chartered Accountants in England and Wales (ICAEW) is
one of a number of professional bodies accorded the status of
Recognised Professional Body (RPB) by the Securities and Investments
Board (SIB) who have the overall responsibility for the implementation
and policing of the FSA. The SIB rule book provides the fundamental
basis for procedures and all those organisations and professional bodies
who have been authorised to control particular sectors must have rules
which demonstrate equivalence with the SIB rules, albeit with particular
Introduction
reference to the class of business being controlled. Authorisation via the
RPB route is not a soft option providing less compliance, it simply
recognises that investment business is not the major part of the business
of a firm of Chartered Accountants.
The ICAEW have the power to provide member firms with the
authorisation under the FSA without which it would be illegal to give
investment advice. Failure by a member firm to comply with the rules it
has drawn up could lead it to withdraw that firm's authorisation and
effectively end its involvement in the investment area. This is a duty the
ICAEW has to undertake if it is in turn to retain its role as an RPB. It is a
role it intends to undertake very seriously and has established with other
Institutes a Joint Monitoring Unit (JMU) to review the activities of
authorised firms. Members of the JMU will undertake review visits to
authorised firms on a regular basis - initially expected to be once every
two years for category 3 and 4 firms and once every five years for others.
Serious breaches of rules could lead to authorisation being suspended
within a matter of hours and the firm concerned then having to apply for
review of its position.
The ICAEW requires authorised firms to provide information to it on an
annual basis to enable the Institute to satisfy itself that all is well. In
particular it needs to be certain that the firm is still carrying on investment
business as an incidental part of its profession and that its fees and
commission from investment work are not exceeding the upper limit of
20% of total fees.
Several key points emerge when considering your own firm's compliance
manual:
1. Your procedures are subject to outside scrutiny and you must
be able to satisfy that scrutiny not only in theory, but, more
importantly, in practice.
2. Your procedures must show equivalence with ICAEW
procedures suitably adapted to your own needs. You cannot,
however, afford to dispense with those areas which are
mandatory, however remote you think the possibility is of your
firm being involved in them.
3. The larger your firm, and the more people you have involved in
investment work, the greater the risk you run of someone in the
organisation committing the cardinal sin which causes your
authorisation to be suspended. You should therefore consider
limiting the number of people who can give advice and ensure
that those who carry your authority are given a full training in the
use of the procedures.
2
Introduction
4. The power of the ICAEW to carry out a random review means
that your procedures should be working at all times and that at
any point in time you can demonstrate compliance in any part
of the organisation. You therefore need your own internal
compliance structure, particularly where you have more than
one office.
Compliance within the firm
This is set out in diagramatic form in figure 1. Each authorised firm is
required by the Institute to appoint a Compliance Partner, whose role is
to ensure, as his title suggests, that his firm has in place the procedures
to demonstrate compliance with the regulations. A sole practitioner must
assume the role of compliance 'partner'.
In a single office practice, the Compliance Partner will be able to exercise
full control over compliance procedures but in multi office firms this will
become impractical and he will need the support of Local Compliance
Officers, each of whom has responsibility for ensuring the compliance in
his own office. It is important that the Compliance Partner and Local
Compliance Officers keep in regular touch and each know their areas of
responsibility. A mechanism for regular reports and visits needs to be
established.
The role of the Senior Compliance Officer is an optional one, which may
be appropriate in larger firms where the Compliance Partner (who must
be a qualified CA) is not involved on a day to day basis with the
investment work. The Senior Compliance Officer undertakes the basic
compliance procedure, reporting back to the Compliance Partner, who
has the ultimate responsibility.
The compliance role within the firm is set out in Part 9 of the manual.
Compliance with the office
This will be necessary whether you are a single or multi-office firm and
the basic areas of control are set out in figure 2. The procedures revolve
around the Local Compliance Officer who has to have control over three
basic areas:
1. Caseworkers, ie those giving investment advice to ensure that
the compliance procedures are being observed on each client
file.
3
Introduction
Figure 1 COMPLIANCE WITHIN THE FIRM
ICAEW
Compliance Partner
Senior Compliance Officer
Local Compliance Officer
4
Introduction
Figure 2 COMPLIANCE WITHIN AN OFFICE
Caseworker
Central Accounts
Registry Department
5
Introduction
2. Central registry - this is a grand title for a role that can be
undertaken by a competent clerical assistant. It is aimed at
providing a check on the caseworkers' procedures and a single
point of reference from which the Local Compliance Officer can
obtain information he needs for regular returns and reports. The
role of the central registry is set out in Part 7 of the manual.
3. Accounts department - because information is going to be
needed about commission and fees. The prime source of this
information must be in the accounting records of the firm.
Additionally it is going to be necessary to have control over
client money accounts and this too will usually reside in the
accounts department.
Compliance on the file
All the compliance structures ultimately stand or fall on the compliance
procedure adopted when dealing with a client. The Act is there to
protect the client and give him rights of redress if things go wrong which
can be shown to be within the control of the investment adviser. The
FSA requires three basic steps in the compliance process:
1. Know your client;
2. Give best advice suitable for that client;
3. Execute that advice on the best terms possible for the client.
As figure 3 shows, these involve a number of other functions and
controls which must be undertaken, eg control of client money, and the
core of the compliance manual is aimed at providing the detailed
procedures necessary to demonstrate that each of the three steps have
been satisfied in any particular case.
Using the manual
When the original manual was prepared, a number of key stages were
involved, which you will still need to follow in some measure in adapting
the manual to your own circumstances:
1. Institute rules were read and the basic requirements noted. The
Compliance Partner cannot use this manual as a substitute for a
full understanding of the Institute rules.
6
Introduction
Figure 3 COMPLIANCE ON THE FILE
existing information
questionnaire. .meeting
know your client
review specific
bbeesstt aaddvviiccee
of market " quotes
permanent
best execution
records
control of
transactions money commission documents
7
Introduction
2. The types of investment work undertaken were investigated. It
was clear that investment advice was often given, investments
were arranged and in some cases investments were managed.
Client money was handled and documents were received and
passed on to the client. Some procedures had to be amended
to meet the new requirements but much of what is in the manual
represents a common sense approach to adapting existing
procedures to the new regulatory environment.
3. The forms were designed and then the procedures were
devised around them. The author, as an ex Civil Servant,
understood the use of form based procedures which, if properly
designed, can save even more paper being generated and can
provide a simple control mechanism. The forms therefore
represent an integral part of the manual and are not an optional
extra. Detailed notes on the design of forms are set out in the
Appendix to the manual, in which examples of all the forms are
reproduced.
4. The accounts department of the firm had to be involved in
getting in place the basic financial controls and sources from
which annual information could be obtained.
5. The draft manual was circulated to Local Compliance Partners
and introduced to them at seminars. Their comments were
incorporated, where appropriate, in the final version.
6. The manual was introduced by Local Compliance Officers to
staff who were going to be acting as caseworkers.
Finally it must be emphasised that the manual, in whatever form you
prepare it, must not be the final, unalterable word. It needs to be
continually reviewed in the light of changes in the Institute procedures;
your own involvement in the investment area, eg moving from category 1
or 2 to category 3; and by reference to experience in practice.
Categories of Authorisation
The ICAEW have four categories of authorisation - the manual was
originally written for a firm with authorisation under category 3. You may
not therefore want to use all parts of the manual if you
are authorised under categories 1 or 2. Specifically:
• category 1 does not require Parts 5 and 6 and other
references to client money;
• category 2 does not require Part 5.
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