Threshold Condition 4 (TC4)

The FSA do not make it easy to find Threshold condition 4 - you need to go to the COND section of the FSA Rulebook and then having clicked on COND2 you need to click on the link 2.4 To find Threshold condition 4: Adequate resources!

In a nutshell, a regulated firm must maintain adequate resources at all times to meet the minimum solvency requirements - and be able to prove that the senior management have their finger on the pulse. can you? Note that I deliberately did not simply state "Financial resources" as TC4 is much wider than simply pounds shillings and pence.

If the Regulated Business is part of a larger Group the FSA will take this into account - but there may be additional risks due to financial pressures placed on other members of the Group. How many small IFA's have the luxury of a defined benefits pension scheme - let alone one in deficit?

The FSA interpret the term 'Adequate' as meaning sufficient in terms of quantity, quality and availability. "Resources" includes all financial resources, non-financial resources and means of managing its resources - Capital / People and Risk Management.

Examples of early warning signs include:

Deterioration in credit scores

Any indication that a Firm is unable to meet its debts as they fall due - is there a danger that a former sales associate could complain due to no payment of commission?

In addition there are the more obvious ones - entering a CVA or IVA; becoming bankrupt or entering liquidation - either the Regulated Business or one caught by the "Close Links" rules.

The Rules also require Firms to have appropriate controls in place to identify and measure regulatory issues - have a look at COND 2.4.6G and SYSC 3.1.

If the Firm is Authorised to handle Client Money has appropriate due dilligence been undertaken regarding the probity of the Institution? I must admit, I thought that was the job of the FSA who after all are responsible for Regulating the Banks. If Client Money is held is it retained in a separate designated client account? Is the money safe and are you reconcilling your ledger balances at least once every 25 days? can you prove it?

Treating Customers Fairly - I

We can all remember when we last received good or exceptional service from a supplier - how did you feel about them and what did you do about it? I recently had a slow puncture and took my car in to the local Kwik Fit garage. Whilst waiting to speak to the chap behind the desk I noticed that they now do car servicing. Having left the keys I went back to the office.

A few hours later I got a phone call - Mr Cass, your car is ready. They were also open until 6pm and I was able to finish my afternoon meetings before collecting the car. How much was the bill I asked? The manager said - no charge - you are a regular client and it was only a faulty valve. No prizes for guessing where I will be taking my car for servicing from now on.

But a happy and content customer doen't mean that you have treated the fairly. Ignorance is bliss - until someone points the error of your ways. So what does this mean for Regulated Firms?

The FSA has set 6 key outcomes that they expect Firms to adhere to.

Outcome 1 - Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.

So, can you prove it? What management Information do you have available to demonstrate that you are complying with outcome 1?

Have you completed a Treating Customers Fairly self assessment/gap analysis and then produced an action plan? Have you reviewed and repeated this exercise at least annually?

If you have retained the services of an outside Compliance consultant - have they undertaken an independent assessment / peer review?

Have you asked members of your team for their ideas? Is this a regular topic at team meetings and has it been recorded?

Do you have square pegs and round holes? Have you recruited the right people to do the right jobs and have they been trained and coached accordingly? Does their ongoing CPD include TCF?

Testing and measuring - what monitoring and feedback are you providing - staff performance against relevant TCF related measures?

Have you set SMART Key Perfomance Indicators? (for example, key performance indicators in areas such as complaints received, cancellations, lapses,
products sold by type/provider etc.)

Are you providing the leadership and direction to your team? Is it TCF focused?

How do you handle any conflicts of interest?


This is not an exhastive list but as you can see - the bar has been set high by the FSA. Most Firms do have a TCF culture - treating their customers as they expect to be treated; keeping their promises and offering good customer service and fair value. After all, if we dont look after our clients then there are plenty of Bankassurance direct salesmen/women that would love to flog policies to your clients. Pity that the FSA seems to focus on IFA's who generate 3% of FOS casework -rather than on the Big Institutions who account for the othre 97%

The Golden Fleece?

...before you ask, it is the name of the Pub that I am writing this blog from in the City :o)

Back to the script.

1st December 2001 was an interesting day - the Birth of the Financial Services Authority (FSA) as we know it today. Will it make its 10th anniversary - I wonder?

Another shuffle of the deckchairs as NASDIM became FIMBRA, which merged with LAUTRO to form the PIA. Then all of the SRO's combined to form the FSA - a single unified Regulator with clear statutory objectives of :


Market confidence in the financial system;

Promoting public understanding of the financial system;

Investor / Consumer protections

Fighting financial crime.

In 2003 no one saw it coming - the FSA, with a detailed set of Rules shifted to "Principles based Regulation" - focusing on outputs rather than strict adherence to detailed rules. How is what you are doing supporting Treating Customers Fairly?

Simply having a happy customer didn't mean that you had treated them fairly and many accepted customs and practices had to be revisited and tweeked. Firms were given ample time to implement TCF within their businesses - and collect management information to be able to prove how Treating Customers Fairly was embedded within their business. Easy when you know how - ask me :o). And then the FSA Interviews started.

another fine mess that you got me into...

The early days of FIMBRA were a steep learning curve for the Regulator and the Regulated. Many of the "rotten apples" found the going too tough to continue as an Independent Financial Adviser and simply stopped selling Pensions and Investments. Prior to "A" day there were circa 550,000 involved in selling Insurance and most families knew their "Man from the Pru", or the agent from Abbey Life - since then there has been a massive fall in the number of Financial Advisers. The forthcoming changes arising from the Retail Distribution Review in 2012 will reduce the numbers still further.

With so few Financial Advisers left - is it any wonder that for many years we lost touch with the "savings culture"? People "want it now" and borrowed to finance their lifesytle aspirations. And the Banks and Big Institutions all encouraged us to borrow. We all did - well, most of us did.

The Regulatory Regime at the time meant that each SRO had to be "self sufficient" as far as possible - but with cross subsidy from the other (most notably LAUTRO)Regulators. FIMBRA was running out of money and an elegant solution was found - by combining the "wealthy" Insurance Company SRO (LAUTRO) with the FIMBRA the Personal Investment Authority (PIA) was formed. Another year, another combined Rulebook - out with the tan coloured FIMBRA Rulebook and the blue Rulebook and welcome to the nice white and green PIA Rulebook - all paid for by fees from the Regulated Community who in turn were paid by you and me via charges to our policies and savings. Good time to be a printer.

Prof Gower and all that

In the early 1980's Intermediaries were free to conduct business as they saw fit. The actions of a few however led to the Govt at the time commissioning Prof Jim Gower to investigate and produce a report with recommendations about the UK financial services industry.

The outcome of the report formed the basis for the Financial Services Bill. The Securities and Investment Board (SIB) was established along with Self Regulatory Organisations focusing on individual sectors - (LAUTRO) - the Life Assurance & Unit Trust Regulatory Organisation was, as the name implies, regulated Life Offices and Unit Trust Management Companies.

The National Association of Securities Dealers and Investment Managers (NASDIM) had been established a few years earlier to licence Investment Brokers to deal in securities including Unit Trusts. NASDIM morphed into the Financial Intermediaries, Managers, Brokers Regulatory Authority (FIMBRA) - which from "A" day - 1st April 1988 regulated Independent Financial Advisers. I have fond memories of the staff at NASDIM - they were helpful and offered constructive advice and support.

Regulated Businesses - both Product Providers and Intermediaries entered a brave new world - and had to comply with the relevant SRO Rulebook(s) - paper based and initially only updated monthly. New jobs were invented - the Compliance Officer and the Money Laundering Reporting Officer (MLRO) - the latter of which also had the title "vice president for going to jail" if anything untoward were to go wrong within a Regulated Firm involving Money Laundering.

In the early days of Regulation things were simple relative to today, we didn't have any rules about training & competence (until 1994), clients had to receive a "quotation or illustration" but they had to be based upon standard assumptions so that every Insurance or Pensions quote looked the same. We could phone up and speak to staff at LAUTRO and get answers that were helpful and meaningful - how times have changed.

In the beginning

When I first started working in the Financial Services Industry in 1980 life was so simple. Firms selling Unit Trusts needed a Licence to deal in Securities as the Prevention of Fraud (Investments) Act applied. The Government at the time decided to extend regulations to those that promoted themselves as Insurance Brokers. People that wanted to use the term "Insurance Broker" had to obtain a licence. There were no such requirements for Insurance Consultants.

Anyone could set themselves up as an Insurance or Pensions Intermediary - provided that they could get an "Agency" from an Insurance Company. Customers were "sold" insurance, investment or pension products and healthy commissions were earnt by Intermediaries.

Large Insurance Companies like the Prudential, Pearl Assurance and Legal & General all had direct sales forces - numbering many thousands. They provided a valuable service to consumers. Many Widows were thankful that the man from Abbey Life had sold their husbands term assurance policies - often at the time perceived to be "hard sold".

Then we had the start of the Nanny State.