FSA's approved person reforms will increase costs, says industry

Alex Davidson 07 Dec 2005

The Financial Services Authority's plans to remove the approved persons regime for wholesale markets would create a new financial burden for firms, compliance officers have claimed. The FSA's proposals, as outlined in consultation paper 05/10, would put the onus on firms to make the checks that the regulator had traditionally undertaken. The compliance officers spoke out in advance of the regulator's response to the consultation, which is slated for early next year.

When new recruits fill in Form A, a process in which compliance officers are heavily involved, the FSA currently does the work in assessing whether the statements made are truthful and complete, a compliance officer said. "Firms should check the accuracy of a statement on the form using a risk-based approach. But under the present regime, they need not do complete routine background checks."

The checking process, by firms or the FSA, can give rise to ethical issues, he noted. "If someone lies on their form by, for example, not disclosing a county court judgement or a shoplifting offence where required to do so, the regulator will not approve them. When the former regulator had declined to approve Nick Leeson because he had not disclosed CCJ, it was a sign that the system was working, and the decision of Barings to employ him in Singapore was at its own risk."

The climate has changed since Barings, and there is now an emphasis on systems and controls. If the approved persons regime is removed, however, it puts a greater burden on the firm, the compliance officer said. "The burden starts at the recruitment stage, and great strain may be put on the relationship between compliance and HR."

If the FSA's proposed removal of the approved persons regime takes place, the firm will have to fill in an equivalent to Form A and probably use an external vetting organisation to check qualifications, education history, any criminal record, debt history and similar, which the regulator currently does, according to the compliance officer.

The proposed removal of the mandatory examination requirement is the other side of the coin. "This is a competence rather than an ethics issue. Passing an exam makes no difference to integrity," the compliance officer said. The industry has given its own views, in a questionnaire via the Complinet web site, on what it thought would be the result of CP05/10 in relation both to approved persons and examinations.

Of the total respondents, only 14.3 per cent though that the FSA would abolish both registration and examination requirements for persons dealing with non-private customers, 35.7 per cent thought that the FSA would keep both requirements (the status quo), and 50 per cent expected a halfway house, to keep registration requirements but abolish exam requirements.

The third strand

There is a third strand to this debate, which is how you assess whether somebody has an appropriate ability to take risks for the job that he or she takes, according to a compliance consultant. "If, for example, a firm takes on a trader, his or her track record will provide a firm indication of risk-taking ability, profile and specialisms. In the case of new recruits, it is more difficult, but the firm should supervise their work."

In the face of industry concerns about Leeson, for example, Dr Chris Dewberry, lecturer at the department of organisational psychology at Birkbeck, University of London, recently gave a group of Securities and Investment Institute members the benefit of his findings on how far it might be possible to check how good employees were at risk taking or decision making.

Dewberry said that most decision making in organisations was not rational. "We choose the least unsatisfactory option — the one that will do." He said that experimental evidence showed people poured more money into a problem to try to solve it, even if there was not much chance of getting it right.

He said decisions were anchored in recent experience rather than being objective, and there was unrealistic optimism with a self-serving bias. "We tend to think we are more in control of things than we are."

Group decision-making

Group decision-making has a distorting effect, Dewberry said. "If a group of people are together, the view the majority had at the outset will tend to be reinforced. There is group polarisation; the cautious will become more cautious, and the risk-seekers more risk seeking. Such group-think can happen in the boards of companies."

Businesses have a "garbage can model", according to Dewberry. "People make decisions based on whom they know rather than weighing up possibilities."

But headhunters at the highest level say they are very careful about how they select recruits for key positions in financial services, including trading, sales and compliance, and they cannot afford to make subjective decisions.

Victoria Scott-Villars, who heads up the legal and compliance team at Principal Search, an executive search firm, said: "We have to be rational, and if somebody is unsuitable for a given role, we must be aware of it. We also take informal checks around the market which gives us the opportunity to cross-reference personal biases which, from time to time, are expressed."

The higher the level of recruitment in compliance jobs, the less formal qualifications matter, according to Scott-Villars. "But there are exceptions. Some firms stipulate that their compliance people must have a good degree — at least a 2.1 — from a top university, no matter how senior the post is."

The views and the opinions expressed in 'hot topics' are that of the individual authors and not necessarily those of the Securities & Investment Institute.