External advice

Published by Financial Adviser 2 June 2011.

The FSA recently published a Final Notice relating to an individual performing a compliance oversight function (CF10) for failing to comply with 'statement of principle seven' in connection with treating client money properly.  The penalty was a £3000 fine (originally proposed at £20,0000) and a prohibition order.  The case is an alarming one for compliance officers for several reasons.

The FSA accepted that the individual's misconduct was not deliberate or reckless but demonstrated a lack of competence and capability.  However, the FSA concluded that as he demonstrated a lack of competence and capability, this did not make him fit and proper to perform a CF10.

The individual stated in interview with the FSA that he had worked previously in the compliance department of another firm but that his duties had not encompassed handling client money matters.  He also stated that before joining the firm he had never worked as a compliance officer and that he did not have any formal compliance qualifications.  The FSA said the individual relied on the service of an external consultant for guidance and support and to ensure that the firm met its client money obligations.  However, the FSA said he did not consider the adequacy of his advice and whether it was reasonable for him to rely on it.  He stated that he trusted the external consultant to provide reliable advice.  Not too unreasonable for him to rely on an external consultant, or is it?

But the FSA concluded that despite the individual's lack of expertise, he did not take adequate steps to improve his regulatory knowledge in respect of client money issues in order to monitor the affairs of the business and to engage effectively with the external consultant.  The FSA said that the financial penalty imposed on the individual was likely to have a significant impact on him as an individual but it was considered to be proportionate in relation to the seriousness of the misconduct.  However, a prohibition order imposing in effect a lifetime ban to perform a CF10 will cause extensive damage to his livelihood and his reputation.

Philip Ryley is a solicitor and Head of Financial Services & Markets at Michelmores LLP, based in Exeter and London.