We welcome the publication of the above document. A summary of our key concerns is as follows:-

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1 12 th December 2012 FAO Mr Neil Dhot Head of Public Affairs Communications and International Division Financial Services Authority 25 The North Colonnade Canary Wharf London E14 5HS 22 City Road Finsbury Square London EC1Y 2AJ Tel: +44 (0) Fax: +44 (0) Dear Sirs APCIMS 1 response to Journey to the FCA We welcome the publication of the above document. A summary of our key concerns is as follows:- 1. Identification of key sectors Broad sectors such as Investment Intermediation or Asset Managers will not enable the FCA s staff to develop the deep understanding to support their supervisory approach; 2. The FCA s demands in respect of different business models should emanate from 1 above and ensure a one-size fits all read across is avoided; 3. The FCA s communications from the FCA should clearly identify what types of firms and/or activities are within the scope of the communication and the content is such that if it covers more than one sector it is clear what the concerns are in respect of each sector; 4. Europe - There are still areas such as policy formation and the supervisory approach where the division of responsibilities between the FCA and the European bodies is unclear and further information is needed on this issue. In addition the FCA needs to pay further attention to establishing a process to co-ordinate with all UK stakeholders on European issues; 5. FCA s service standards - The FCA should review the FSA s existing service standards, determine and then publish FCA s service standards having regard to the needs of firms and other stakeholders; 1 The Association of Private Client Investment Managers and Stockbrokers (APCIMS) is a trade association representing 182 member firms. Of this number 119 members are private client investment managers and stockbrokers and 63 are associate members who provide related services to our firms. Member firms deal primarily in stocks and shares. They also deal in other financial instruments for individuals, trusts and charities and offer a range of services from execution only trading (no advice) through to full portfolio management. Our member firms operate at more than 580 sites in the UK, Ireland, Isle of Man and Channel Islands, employing c employees. Over 509 billion of the country s wealth is under the management of our members. Our aim is to ensure that regulatory, tax and other changes across Europe are appropriate and proportionate for the investment community. Association of Private Client Investment Managers and Stockbrokers Company limited by guarantee Registered in England and Wales No VAT Registration No

2 6. FCA s costs - Action is taken to ensure meaningful information is available to firms to monitor the costs of the FCA. We have been actively engaging with the individuals responsible for establishing the FCA and the above publication allows us to provide feedback on a number of issues. We are very much supportive of the desire of the FCA to have a high level of engagement with stakeholders on a range of issues. The response may focus upon some areas of concern but we intend our comments to be constructive and look forward to a continuing dialogue on the development of the FCA. Our detailed comments on the paper, which includes further consideration of the above points, are set out below; for ease of reference we have adopted the same headings as those used in the publication. Chapter 1: The creation of the FCA: Spotlight on some of our new powers Product governance and intervention It is important that the powers granted to the FCA in respect of product governance and intervention are used wisely. The paper makes reference to the FSA s consultation on nonmainstream pooled investments where extensive work that found that three-quarters of advised sales of UCIS to retail customers were unsuitable. This statement is incorrect; only 14 IFA firms were reviewed. The FSA s sample was both too small and too narrowly-focussed to provide a reasonable justification for instituting significantly enhanced promotional restrictions for UCIS. We do not see how such small-scale findings in relation to UCIS can serve as the basis for an extremely wide-ranging regime that seems likely to impact upon some forms of investment, such as ETFs, which are very commonly held by private investors and which are valued by portfolio advisers and managers for providing diversified access to alternative asset types at relatively low cost and in a way which allows for accurate tracking of relevant benchmarks. Product governance and intervention powers will require the FCA to recognise that the financial services sector is not homogenous. An assessment of the impact on the market as a whole is required before intervening. In addition, care is needed to ensure there is an appropriate degree of precision in determining exactly what types of products are intended to be caught by the ban. In our view, the consultation paper on non-mainstream pooled investments and subsequent feedback from stakeholders should be carefully reviewed by senior management responsible for establishing the FCA. We suspect it will highlight a significant number of shortcomings which should inform the FCA s future approach to exercising their powers in respect of product intervention. Publicising enforcement action Considerable concern has been expressed by stakeholders and parliamentarians about the potential reputational damage to firms arising from the publication of warning notices. It would be helpful if the FCA could explain whether this is an issue senior management will keep under review and, if it is, how feedback will be provided to stakeholders. In addition, the paper fails to explain what action the FCA intends to take following the publication of a warning notice if no further action is subsequently taken by the FCA. If the publication of warning notices is designed to help consumers better understand the action we are taking on their behalf, and bring potential problems to their attention earlier then what action does the FCA intend to take to inform consumers, in a timely manner, where no problems have subsequently been found? We have raised this issue on a number of occasions and we are disappointed that the paper has not addressed this issue. 2

3 Chapter 2: Protecting the perimeter Waivers We note the content of this section but we are surprised that there is no reference to the fact that the FCA will not be in a position to issue waivers in respect of rules derived from European Directives and especially Regulations. Chapter 3: Ensuring firms continue to meet our standards Introduction A major concern for all firms is the impact on their business from the funding costs of the Financial Services Compensation Scheme (FSCS). For the levy period 2008/2009 to the annual levy for 2012/2013, the compensation levies total 1,178,120,000. Whilst we do not advocate a no default regime, it is the case that the industry is of the view that a significant part of these claim costs is attributable to a failure of the FSA to properly supervise firms. There is no information in the paper to explain whether or not mitigating the potential impact of claims on the FSCS is a factor which has been considered in formulating the FCA s supervisory approach. Nor is there any indication in the paper that, in formulating the FCA s supervisory approach, an analysis of firms defaults has been undertaken to determine whether or not there are lessons that could be learnt in terms of developing the FCA s supervisory process. It would be helpful if the FCA could indicate the extent to which claims on the FSCS have been considered in developing its supervisory approach. Categorising firms In categorising firms it would be helpful if further information could be provided in respect of the categorisation of firms holding clients assets and whether or not there is a relationship with the CASS firm types set out in CASS1A.2.7. The information in respect of C1 firms makes reference to client assets but we believe the majority of our members will be C3 or C4 firms and it is unclear as to what impact holding clients assets has on the categorisation of firms. One of the key building blocks of the FCA s supervisory approach will be the engagement with groups of firms and trade associations, as appropriate, to gain a more in-depth understanding of specific sectors, along with building an open and transparent relationship. We welcome this approach; it is essential that the FCA provides a marked difference to the one size fits all approach of the FSA. APCIMS and our member firms are very committed to assisting the FCA gain an in depth understanding of our sector. The FCA needs to understand that our sector has high expectations that a cadre of regulators within the FCA will develop a detailed understanding of our sector s business models and activities. This will be a key factor by which the sector is likely to judge the effectiveness of the FCA as a regulator going forward. How we will supervise firms In respect of the supervisory pillars Event-driven work and Issues and products ( EDWIP ), our major concern is that work is undertaken to address potential failings in one sector of the market and automatically read across to other sectors, including our own, without any further work being undertaken to determine whether or not the findings are applicable to our sector and our member firms business models. This continues to be a problem with the FSA; we would refer you to our comments in the section above entitled Product governance and intervention and the issues in respect of the FSA s consultation on non-mainstream pooled investments. 3

4 Similar issues have also arisen in respect of the recently published Guidance Consultation on Financial Incentives, where only one firm within our sector was subject to review. Before embarking on EDWIP supervisory work we would encourage discussions with stakeholders and perhaps undertake a limited number of pilot reviews to fine tune the supervisory work. We would welcome much greater transparency about the nature and extent of the supervisory work before it commences. It would provide an opportunity for all firms to consider whether or not they should conduct their own reviews to determine if there are issues that should be addressed. It would be helpful if the FCA could be clearer as to what will be communicated to firms both during the course of, and following the completion of EDWIP supervisory work. Our firms wish to comply with the rules and want to know, in the context of their business models, what issues of concern are arising from the FCA s supervisory review. What firms do not want is what happened under the TCF programme, namely, to have to review case studies in respect of mortgage brokers and then try and work out what the issues are for their business models. Similarly, they do not wish to read a Guidance Consultation on Financial Incentives, which is essentially written in the context of bank staff selling product to small savers, with no clear indication as to what the issues are for their sector. The FCA needs to be as explicit as possible in detailing the concerns arising from their supervisory work in the context of individual sectors. The FCA should not make generalised comments and leave it for firms to try and figure out for themselves the exact nature of the FCA s concerns in the context of their business models. We believe there should be greater consultation before publication of a Guidance Consultation to assist in ensuring the content addresses these issues. The FCA needs to provide feedback at the earliest opportunity, both during the course of their work and upon completion and use trade bodies to assist as part of this process. In respect of the recent Guidance Consultation on Financial Incentives, the field work covering 22 firms was undertaken between September 2010 and September 2011 and the resultant guidance consultation was not published until a year later. Our view is that the field work should have been completed much more quickly; the time span between the completion of the fieldwork and the publication of the resultant guidance is far too long. Similarly, the FSA s consultation on non-mainstream pooled investments published in August 2012 appears to be entirely based on the paper entitled UCIS: project findings published in July We note the FCA will use a sector risk assessment to drive this issue and product work. It is important that the sectors correctly identify firms undertaking the same types of business. We are concerned that the paper makes reference to the investment intermediary sector which fails to recognise that the business models for APCIMS firms are different from those of say IFAs. In addition, APCIMS firms are MIFID/CRD firms in contrast to most IFAs which are not. We have consistently encountered problems because the FSA has failed to recognise that there are distinct sectors covered by the term investment intermediation and we would urge the FCA to consult before finalising their sector definitions. European and global context There is currently considerable confusion amongst member firms as to the exact status of guidelines and other communications originating from the European Supervisory Authorities (ESA). The FSA has not explained to firms how the publication of such communications relates to their existing rules, particularly where the ESA are issuing communications that appear to place obligations on firms. The FCA should consider and publish its policy on implementing or otherwise addressing such communications and, if applicable, ensure firms are made aware of any additional obligations that the FCA may impose. It would also be helpful if the FCA could ensure that there is appropriate co-ordination between communications originating from it and 4

5 the ESA. For example, the FSA s GC on Financial incentives was published four days before the ESMA consultation on Guidelines on remuneration policies and practices, which covers substantially the same issues, which one are our firms supposed to follow?. Chapter 4: Taking action against firms that do not meet our standards Being more transparent in our enforcement process We note the FCA will publicise, to the extent that it is legally possible, cases where we have intervened but formal action has not been taken. There is a lack of information in the paper about how the publication process will work and what checks and balances will govern the publication of such information. This is an issue of concern to firms and more information on this issue should be published. Our understanding is that the content of Final Notices is the responsibility of the FSA s Enforcement Division and, as far as we are aware, the content is not reviewed by the FSA s policy staff. We have encountered difficulties from time to time when reviewing Final Notices because the content differs from the information provided by policy staff. The explanation has normally been that the policy position is unchanged and that the content of the Final Notice is written in the context of the individual firm. Whilst we accept this position we do believe that consideration should be given to allow for a formal review by policy staff. Such action would ensure that any commentary on the rules within a Final Notice does not contradict the FCA s policy position. Chapter 5: Building our understanding of the markets The link between high-severity incidents and regulatory performance There is considerable information about the actions the FCA will take to minimise the risks to consumers of problem arising. Whilst we note there are references 2 to the FSA s risk tolerance we are unclear from the content of this section what the FCA s risk tolerance will be. In determining the risk to consumers there is no indication as to whether or not the existence of the FSCS is a factor which is taken into account when making a risk assessment in respect of consumers. Research We would urge the FCA to publish its research into the risks in financial markets for both firms and consumers. The publication of the research will assist firms in their own risk assessment and also provide the opportunity for external challenge to the research and associated findings. Engaging earlier APCIMS and our member firms would very much welcome the opportunity to engage earlier with the FCA on their policy proposals. We will work actively with the FCA to identify relevant firms to engage with when addressing specific issues. The FCA should also address what actions it can take to provide assurance that the consultation process is a genuine consultation. At present, the policy staff responsible for the original proposals are, effectively, also responsible for the consultation process and, in many cases, changes to a consultation paper appear to result in a loss of face internally so there is a 2 For example, the FSA Board decided that it would have zero tolerance of absolute loss to retail consumers in excess of 250m and that smaller but still significant total losses should not occur more frequently than once every five years. 5

6 resistance to making them regardless of market views. The feedback to consultations is often sparse, with no indication that the responses have been properly considered or that there has been any independent supervision of the process or internal challenge. We need to avoid unintended consequences of policy measures. Bad decisions and outcomes could be avoided if there is greater co-ordination across market sectors. An example of this is the inclusion of execution only brokers providing custody services being included in the definition of platform service provider. This served one initial purpose but is now creating many challenges. In common with the ESAs and the Treasury Select Committee, we believe all responses to a consultation should be published on the FCA s website. Chapter 6: Maintaining effective relationships The regulatory family It is currently unclear exactly where responsibility lies between the FSA and the Money Advice Service ( MAS ) in providing consumer information. One of the MAS s statutory objectives is to enhance the nation s financial capability, with responsibility to develop consumer financial education, raise public understanding and knowledge of financial matters and the ability of people to manage their own financial affairs. However, we have been told that the FSA has taken on responsibility for educating consumers about the RDR because the MAS do not wish to do it. Going forward, it is important that there is a clear statement as to what the respective responsibilities of the FCA and the MAS will be in providing consumer information so that both organisations can be held to account. There also needs to be greater recognition of the needs of the 4 million plus clients of APCIMS s member firms. Working with EU and other international bodies Currently, there appears to be no one individual within the FSA responsible for overall day-today management of the engagement with the EU and other international bodies. In respect of the EU, in many cases stakeholders such as ourselves and the FCA will be in agreement with the policy objective and the focus of our work will often be directed at explaining the nature of our business models and/or UK markets. We believe there is an opportunity to significantly improve intelligence and co-ordination in terms of UK stakeholders in Europe and we would recommend, as a matter of urgency, that the FCA considers establishing regular meetings reviewing European issues with groups of stakeholders. Working with firms We welcome the FCA s intention to engage more with firms, trade associations, the practitioner panels and other relevant stakeholders when we start pieces of thematic work on issues and products. We have already had discussions with the relevant staff on this approach and would reiterate our intention to engage fully with the FCA and to provide full co-operation and assistance. We note the FCA s intention to have a touch point with smaller firms at least every four years versus the FSA s original objective of a contact at least every four years (which plainly did not occur in many cases). Such touch points need to be as sector and firm specific as possible such that firms register their interaction(s) with the touch points. We note the FCA website is currently being developed. APCIMS and our member firms would be willing to provide input, particularly in respect of the firms section of the website, if this would be of assistance. We presume some firms and other stakeholders will be asked to test the pilot site and provide feedback? We would strongly recommend that the redevelopment of the website considers the views of all users of the website. 6

7 Chapter 7: Accountability, Transparency and measuring our success Panels In respect of the market practitioner panel being established by the FCA, it is important that there is sufficient representation from users of the market acting for retail clients and agency broking firms who undertake transactions in retail orders. Investigations into regulatory failure Our view is that material claims on the FSCS, determined by reference to the size of individual compensation class thresholds, should be regularly reviewed to determine whether or not an investigation is required. Funding The FCA should carefully consider what information will be provided when consulting on its funding. It should provide more information than the FSA, allowing the funding requirements to be subject to an effective consultation process. Action needs to be taken now to ensure that, as the FCA develops, it is in a position to provide historic data, cost trends and cost activity analysis; together with details of capital project spends and resultant outcome compared to budget and service delivery, including whether or not anticipated cost savings as a result of the implementation of the capital projects have been achieved. Simply following the current FSA approach is not an acceptable consultation process; it does not provide sufficient accountability to firms and other stakeholders. Our staff We believe the FCA should consider carefully whether its proposed recruitment process will be fit for purpose when seeking to attract older and experienced staff. We do not believe the current FSA approach is geared up to attracting experienced staff. For example, most, if not all, of the individuals featured on the experienced staff section of the FSA s website appear to be under 40 (and of those featured at least one left over eight months ago). The FCA will have to market the organisation in order to attract experienced staff who are more likely to apply for positions once they have had an opportunity to understand more about the organisation. Our view is that the FCA should seek external advice to determine whether a different recruitment process should be adopted for older experienced staff. The FCA needs to consider the extent to which it provides the industry and other stakeholders with confidence that the supervisory staff have the qualifications, knowledge and experience to undertake their roles. We note the FCA will challenge firms strategy and business models but firms subject to such a challenge want assurance that the individuals are suitably equipped to make such judgements. In the context of the RDR the FSA has been challenged to explain what qualifications they expect the FSA staff to hold and press comments attributed to the FSA state The level-four qualifications are not a prerequisite for employment in the FSA. The skill set for FSA staff is different to that of financial advisers. Therefore we do not maintain a record of level-four qualifications. Whilst we note the response there is currently a lack of transparency as to whether FCA staff will be required to have a minimum level of qualification and what types of qualifications would be acceptable. A review of the FSA s graduate development programme suggests graduates joining the FSA are encouraged to obtain qualifications but there is no requirement for them to obtain qualifications. In contrast, many graduates joining regulated firms are required to obtain industry qualifications, usually at a higher level than that needed by the FSA rules to carry out their role, for example, many graduates recruited to our sector are required to obtain the CISI s Masters in Wealth Management qualification within a specified time period. 7

8 It is important that sector specialists are recognised by the industry for their knowledge and understanding of the sector. We are concerned that the sectors are being defined too broadly and a sector specialist for investment intermediation with an IFA background would not necessarily have a sufficient depth of knowledge of our sector. Competition We have told you how we intend to fulfil our new competition objective, but we are interested to hear what you think. We want to know your views on our approach and whether you think something else may work better. Whilst firms understand that the FCA will have a competition remit, it is still unclear to firms what exactly this will mean for them in terms of running their day-to-day business and there is an ongoing communication exercise needed to help build firms understanding. There are a number of references in the paper to competition in the context of products but it would be helpful if there was further information in respect of competition and investment services. In which financial services markets do you think competition is working well in the interests of consumers and in which ones is it working poorly? What do you think the reasons are for this? We have no specific comments to make in respect of our sector. Our perception is that our firms operate in a competitive market place. Are there markets in which you face material barriers to entry or expansion? What are the barriers? Are there any undue regulatory barriers? There are significant regulatory barriers to new entrants entering our market place. The FCA needs to be an effective gatekeeper to ensure only fit and proper firms and individuals are authorised. However, we regularly receive feedback that the authorisation process and the variation of permission process are not efficient. We believe this is an area that the FCA should review having regard to the experience of stakeholders to determine whether or not improvements could be made. In particular, we question the extent to which individuals with specific sector knowledge have input into the authorisation process. Clearly, new entrants have to have sufficient capital to meet their regulatory requirements but in recent years the amount of capital required has significantly increased in certain sectors to take account of the costs of funding the FSCS during a firm s start up period. Gathering and receiving information We want to gather and receive information about what is going on in firms and the market from as wide a range of sources as possible. We want to hear your views on how this information can be best collected and provided. As a first step, we believe there needs to be a full audit as to what data the FSA currently collects from firms, for what purpose and by type of firm, along with data it obtains from external sources. Such information should be available to all staff. We have meetings with FSA staff where we identify that the FSA already collects data in respect of certain topics which the FSA staff at the meeting are not aware of. We are also aware that a department may subscribe to external data which is not known to staff in other departments. In addition, the audit should review why certain types of data are being collected, and for what purpose, as we suspect that certain data provided by firms is no longer being used by the FSA. 8

9 In many cases the FCA will be seeking data to determine how firms are managing and controlling certain types of risk. Our view would be that the starting point is to visit a range of firms to determine what data and management information they currently hold and to help them manage and control such risks. Our expectation would be that a common data set would be identified which may meet the FCA s needs without the need for expensive system upgrades. Equally, by visiting firms, it would also give the FCA an insight into the difficulties of producing certain types of data, for example, due to certain system constraints or the manner in which data is held in external files, such as stock files or price dissemination files. There also needs to be recognition that the data held by different sectors will vary. The management information held by an APCIMS firm may differ from that of an IFA. For example, we identified problems in collecting data via the RMAR form in respect of the RDR because the proposal in the consultation paper tried to capture data for both our business models and the IFA business models without recognising that the data held by firms differed. Whilst the issue in terms of what should now be reported has been addressed we do not believe the data collected is meaningful in terms of the issues the FSA is seeking to monitor in respect of the RDR. We would also like to see transparency as to what the FCA will actually do with the data it collects. Many firms have commented that they do not believe the FSA actually reviews and/or understands the data that they have submitted. For example, firms have told us that they have subsequently spotted a basic error in a financial return sent to the FSA which has not been picked up. There is a common perception that most staff within the FSA do not have the financial knowledge to readily understand the financial information submitted to the FSA. The FCA should consider requiring a regulatory return reconciling the regulatory report for the firm s accounting reference period end with a firm s audited accounts. How can the FCA make it easier for firms, consumers and organisations to provide information on what is going on the financial services and markets? What can the FCA do to make you more likely to provide such information to us? We would refer you to our comments to the previous question. Other matters Service standards The FCA should establish a set of service standards, which meets the needs of firms and other stakeholders, not the FCA. The FSA is not regarded as a particularly efficient organisation and, in many cases, s and other communications from firms are not responded to in a timely manner. For example, we believe the FSA s current time limit of 12 working days for a response from the contact centre is far too long. On what basis did the FSA determine this time period is acceptable in terms of meeting the needs of firms? We are also aware that the contact centre does not meet this existing service standard particularly for non-routine queries. Equally, data held by the FSA is often not fit for purpose, for example, the register of funds does not contain where applicable, the funds ISIN number. (How can firms and the FCA monitor UCIS funds when no data is readily available in a suitable format to readily identify UCIS?) We would recommend that the FCA engages now with firms to gain an understanding of the day to day issues firms experience in their routine engagement with the FSA. Use of consultants The FCA should carefully consider its use of external consultants and satisfy itself that the actual consultants working on assignments have the appropriate depth of knowledge and experience. In our experience many of the consultants engaged by the FSA have had very sparse knowledge of 9

10 the issues they are seeking to address. If consultants are used widely then their knowledge and experience is not retained within the regulator itself. Regulatory burden A considerable amount of regulatory material is currently issued by the FSA, such as, consultations, guidance, speeches, final notices, etc., that firms need to review. There appears to be nobody within the FSA tasked with reviewing the volume of material emanating from the FSA; a simple page count of the material on an annualised basis would show firms have to read in excess of 5,000 pages. Similarly, there appears to be no overall co-ordination to smooth the workload on firms; consultation papers are published with no regard to other consultation papers currently open for consultation. The FCA needs to ensure that a senior manager has oversight of the volume of regulatory material being issued and the burden that is being placed on individual firms. The timing of publications needs to be carefully considered having regard to other demands being placed upon firms. It is disappointing that there is no recognition in the paper of the ongoing regulatory burden being placed on firms and no indication as to what measures the FCA intends to take to minimise the regulatory burden on firms. For example, is the FCA intending to review the current FSA Handbook to consider removing certain regulatory obligations? In introducing new obligations should there also be a review of what regulatory burdens could be removed? The current government initiative the Red Tape Challenge may provide a model for reducing the regulatory burden and improving service standards. We recognise that the staff responsible for the development of the FCA are committed to engaging with us and we are grateful for the opportunity to provide further feedback. We would be happy to meet with you to discuss our response. Please do not hesitate to contact us if you wish to clarify further any of the points raised in this letter. Yours faithfully Ian Cornwall Director of Regulation 10