Why it's Not Just Investors Who Need to be "Scam Smart"

I was really pleased to see that the FCA has ratcheted up its efforts to promote awareness of investment scams to the public. If you don’t know anything about this, visit the FCA website and you’ll find a section headed “Be a Scam Smart investor”.

Here you’ll find all sorts of useful information, including case studies and tips on how to spot scams. There’s also a list of firms that investors need to be wary of if they come into contact with them.

This is a very important resource. Primarily because investment fraud is an issue that’s not going away. In fact, it’s becoming more and more sophisticated, which is presumably why the FCA felt the need to educate the public in more depth about it.

So, why am I talking about this here? Because this initiative serves as a timely reminder to firms to check that they’re doing all they can to ensure that financial crime is not allowed to take place through their activities.

After all, this is a strict regulatory requirement. One that moved to front and centre when the FCA took over from the FSA in April, 2013.

The previous regulator had four statutory objectives; one of which was “…reducing the extent to which it is possible for a regulated business to be used for a purpose connected with financial crime.”

The FCA has three statutory objectives: to secure an appropriate degree of protection for consumers, to protect and enhance the integrity of the UK financial system, and to promote effective competition in the interests of consumers.

So where has financial crime gone? It would be easy to conclude that it’s effectively a key component of the first two objectives. And of course you’d be right. But where is it described explicitly?

To find the answer to that, you need to look at another set of requirements, the Threshold Conditions that need to be met for a firm to become authorised.

A number of these apply to both FCA and PRA authorised firms, and one of them talks about Suitability. This is defined as firms being fit and proper having regard to all circumstances, including the need to minimise the extent to which it is possible for the business carried on by a firm, or to be carried on by firm, to be used for a purpose connected with financial crime.

In practice, financial crime (or the prevention of it) has changed from being one of the FSA’s considerations when assessing the risks posed by firms to its statutory objectives, to a fundamental consideration under the new regulators, as to whether a firm should be authorised at all.

Or to put it another way, there’s a shift from considering financial crime prevention in the wider regulatory universe, to looking directly into firms’ activities. Firms are expected to have sound financial crime controls at their core.

And not just at the point they apply for authorisation. Both the FCA and the PRA have indicated that they intend to use the threshold conditions as a forward-looking supervisory tool; more so than would have happened in the past.

For existing regulated firms, though, there is the temptation to apply the “so what?” test here. If they already have financial crime controls in place, then why should they worry about where these are mentioned in the regulatory framework?

The answer here comes in two parts:

  1. The focus on financial crime controls in firms by the FCA is only likely to increase in the immediate future – it has said as much in its 2014/15 Business Plan, particularly with regard to anti-money laundering; and
  2. The means by which financial crime is committed are changing and becoming more sophisticated.

So even if the controls and procedures to combat financial crime look robust on paper and have passed the inevitable tests from compliance monitoring and internal audit, there is an ongoing knowledge issue here that needs to be addressed. 

Because often, one of the most effective ways that financial crime can be thwarted is by the actions of staff who are able to identify suspicious activity, and report it to their Money Laundering Reporting Officer.

And that only works effectively if they’re trained, and their training is kept up to date.

Of course there’s a regulatory requirement for training. But it doesn’t cover every aspect of financial crime. The requirement in the Senior Management Arrangements, Systems and Controls handbook is for appropriate training to be given to employees in anti-money laundering (and anti-terrorist financing). But there’s no mention of training in the prevention of fraud or market abuse here.

So, providing training in these areas at appropriate intervals would tick that particular box in the rulebook, but firms do need to keep an eye on the Threshold Conditions too, when designing and maintaining their training programmes.

Plus there’s also the matter of doing the right thing by their customers. If the public are being educated more deeply in how fraud works and how to spot it, how much more important is it for those of us in the industry who legitimately manage their investments to do what we can to look out for them?

Likewise, it’s equally important for firms to protect themselves against financial crime losses as far as they possibly can. Whilst many will have risk appetites for such losses, they won’t want to exceed them, and in practice will be looking to undershoot them.

So if training is the cornerstone of these controls, where do you start if you need to make improvements? The good news is that the opportunities to receive training on the subject of financial crime are increasing all the time.

And if you click here, you might be surprised at just how easy it is to find out what opportunities actually do exist.

Martyn Oughton 

By Martyn Oughton a Professional Member of the International Compliance Association (ICA).  Martyn now writes a regular blog for Industry Events Online focusing on the importance of training in all aspects of compliance. Read Martyn's other publications at Martyn's Writers Residence website.

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