The challenge
Over the past few years, the FCA has become increasingly concerned about investment firms working with multiple Appointed Representatives (ARs). This has resulted in at least half a dozen firms being served with Section 166 Notices, requiring them to submit to (and pay for) a report from a Skilled Person approved by the FCA.
By the time one such firm approached Thistle Initiatives for help, unproductive discussions with the regulator had escalated to the point where a 166 notice was very much on the cards. The FCA had significant concerns about the firm’s onboarding and subsequent monitoring of its extensive AR network - not least because some of these ARs were advising retail clients on high-risk illiquid securities - another current area of concern for the FCA.
It’s important to be aware from the outset just how serious the consequences of a 166 can be. Quite aside from the very significant financial and time costs entailed by a Skilled Person’s review, a damning report could lead to large fines, withdrawal of regulatory permissions, and ultimately having to cease trading. The first thing our expert team did after being engaged was to encourage the client firm to recognise these high stakes and adopt a more emollient and cooperative attitude in its discussions with the regulator.
The solution
On a number of previous occasions, Thistle Initiatives' team has been able to stave off a Section 166 order by agreeing with the FCA that we would undertake our own (faster and far less costly) investigation into the items targeted for scrutiny in a draft 166 Notice, and subsequently conduct a follow-up audit to assess how successfully the client has ameliorated the FCA’s areas of concern. This avoids the expense and jeopardy of a full-blown 166, while offering the regulator a route to achieving its regulatory objectives.
In this instance, however, our involvement came too late in the process to head off the appointment of a Skilled Person. What we were able to achieve, however, was to work with the client to prolong negotiations with the FCA and the Skilled Person so as to gain a few crucial months in which to address and ameliorate some of the arrangements that would have caused the most concern.
The Skilled Person’s remit was very much focused on reviewing the firm’s current provisions - rather than carrying out any kind of retrospective review. This allowed us to work with the client to make changes that left it in significantly better regulatory shape. This included reviewing its AR panel on the basis of a restated risk appetite, which resulted in the client off-boarding between a quarter and a third of its ARs.
Another of the most important changes we made was to introduce the client to Thistle Initiatives' powerful proprietary AR monitoring portal, Compliance Star, which provided a sound framework for ensuring good practice going forward and helped justify the modest scale of the firm’s in-house human resource in this crucial area. In tandem with this, we also helped the firm remedy a number of weaknesses in its governance, policies and procedures and ensure its due diligence approach was fully fit for purpose going forward.
The result
The client was delighted at how Thistle Initiatives' input had helped it return from a position of significant existential peril to reestablish a harmonious working relationship with the regulator. Surviving the trauma of a Section 166 investigation is not something to be taken for granted. Not all firms do. But in this case, although the process was far from pain-free, Thistle Initiatives' client emerged older, wiser and ultimately stronger.
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