The Financial Services and Markets Act 2000, which took effect on 1 December 2001, a date now infamously known as N2, was intended to increase the responsibility of senior management working in financial services for any breaches of control arising within their firms.
But findings from a new survey carried out by mid-tier firm Smith & Williamson – and released exclusively to Accountancy Age – show that the transfer of regulatory authority to the FSA has not gone as smoothly as anticipated.
Of 154 companies and firms operating in the financial services sector polled, fewer than one in three said they believe the introduction of the FSA has had a positive impact on business. This compares unfavourably to results in Smith & Williamson’s 2001 survey, when around 50% of respondents saw a positive impact.
Perhaps more alarming is that 40% of those polled said they believe the FSA’s inception has not reduced financial crime within regulated companies, though somewhat worryingly this figure rises to 55% for larger companies.
Giles Murphy of Smith & Williamson’s specialist financial services and markets group, says the regulator has some work to do to win the confidence of those it oversees. ‘With the initial transfer of regulatory authority to the FSA now behind us, the FSA clearly must strive to live up to the expectations it has created and ensure member firms are aware of their responsibilities and do not become disillusioned,’ he says.
Murphy says the real problem is that senior managers of financial services firms still don’t appear to have taken on board the importance of the FSA and seem unsure of what they need to do to ensure compliance with the new regime.
‘There’s definitely still a bit of complacency,’ he says. But he acknowledges that it is also partly due to a communication problem on the FSA’s side.
‘The FSA has a mammoth task on its hands. Its real battle is to get its message across that companies have got to comply, or face penalties,’ he adds.
Murphy believes that part of the problem with the ongoing lack of compliance by a minority of companies is that there were few reported incidents of the FSA penalising non-compliance in its initial stages. As a result many companies have slipped into a state of ‘we’ll cross that bridge when we come to it’.
But despite this criticism, the FSA is clearly not shy about exposing firms that it claims fail to comply with the new rules.
Just last month, the FSA posted on its website for all to see a controversial press release involving two firms of accountants.
In the statement Carol Sergeant, managing director of the FSA, said: ‘Our evidence suggests that Dobb White & Co, Morris White & Co, Mr Gangar and Mr White have not confined themselves to accountancy, but have been running what appears to be an unlawful investment scheme that has probably taken substantially in excess of $18m (#11.4m) from the public.’
The Midlands-based accountancy firm has denied any wrongdoing after having its assets frozen and being barred from carrying investment work after the FSA sought out an injunction at the High Court.
The FSA brought the action against the two firms after an investigation by the regulator into what it alleges is an $18m ‘unlawful’ investment scheme.
A statement issued by Dobb White & Co confirms the FSA investigation was in connection with an investment scheme, but the firm insists: ‘Dobb White & Co deny any allegation of wrongdoing.
‘Its partners will be defending themselves vigorously and in particular deny the specific allegation of being party to carrying on an unlawful investment scheme.’
The case is ongoing and no doubt being watched closely by firms and companies regulated by the FSA.
But compliance is on the agenda, according to the Smith & Williamson research. The survey suggests that compliance is a growing issue and it is discussed monthly by senior managers of 90% of firms interviewed.
But this focus has led to an increase in costs. Nearly two in three companies said that costs have risen by more than 25% in the last two years. And one in five firms’ costs have increased by more than 100%.
The FSA itself prefers to concentrate on the regulator’s achievements post N2, one of which includes a reduction in costs.
‘We have kept our costs level in real terms,’ says a spokesman. ‘The risk-based regulation approach has been rolled out successfully. There’s greater understanding in the industry regarding responsibilities to combat firms being used for money laundering. And there’s a big advance in industry in senior management responsibility.’
The FSA’s task is a mammoth one, but one it must rise to and quickly before FSA chairman Sir Howard Davis hands over to his successor in 2004.
Some are already arguing that its role of protecting markets and consumers is proving divisive and should be split. Yet that would be a return to disjointed regulation of the past.
However it hits back at its critics, the FSA must ensure a perception of a tough enforcer, as well as strict regulator.