New Account Acceptance

Implementing Measures to Restore Confidence in the New Account Acceptance

Background:

The Scenario:

You are a Compliance Officer of a financial services organization that has suffered from a number of internal problems during the past year. These problems have also impacted upon the institution's reputation.

Key Problems:

For the majority of the last year the client facing business units were without their Operations Director and many operational difficulties were experienced;

The organization introduced new group standards for customer acceptance, which have proved unpopular in the market generally.

These problems adversely impacted on the service offered to customers with the result that there have been an increasing number of complaints and your organization is no longer viewed in a positive light by the market. It has also been noted that staff morale has suffered and that staff turnover in the last year has increased to 25%.

Tasks:

a) Identify the main areas and potential conflicts that the Compliance Officer needs to address.

b) Identify the possible risks that the organization is exposed to.

c) Discuss the main controls/actions that need to be taken to restore confidence in the new account acceptance policy.

New Account Acceptance - Introduction:

In dealing with these issues of reputation, customer and staff retention and satisfaction some serious queries have arisen in respect to the new regulatory regime of the Financial Services Organization (FSA). As a company that is in the financial markets there are a strict requirements, guidelines and laws that need to be followed. This report will investigate the problems that the new account policy has created and will then aim to rectify these problems with a view to enable this new account policy to become successful. The first chapter of this report will discuss the areas that must be addressed in order for the organization to be fully compliant with the requirements of the FSA, as well as considering possible conflicts and ways to remedy these conflicts. This chapter will go over operational risks and actions needed to be taken. These risks and actions will be summarized in chapter's two. Finally this report will summarize its findings and outline the necessary actions of the organization. It is first of all essential to reiterate the goals of the FSA which are to reduce financial crime and protect the consumers of the financial markets from illegal and negligent dealings, which encompasses everything from criminal sanctions through to ensuring that all employees are properly qualified; therefore a broad range of aspects will be considered.

Chapter One - Problems to be Remedied:

Key Problems:

There are three key areas where problems are easily identifiable for the organization which are; the lack of proper organization with respect to operations; customer satisfaction; and staff morale. The first question that has to be dealt with is whether the bad market name is a direct result of the new policy or lack of organization in the customer service side. It would seem that the lack of an Operations Director will have a major negative impact on the organization because if one considers the basics of company law a director holds special duties of care to the company and subsequently the shareholders. Also in the light of new EU regulations the customer is considered the king. The latest EU regulation is ensuring the protection of the consumer under the Sale and the Supply of Goods to Consumer Regulations 2002 (SSGR). The focus of the SSGR is to make the consumer the King of the transaction and properly protected by the law. Therefore under any contract the consumer has extra protection in order to balance the playing field. A consumer under the SSGR is defined as:

For example if a company was under going liquidation and consumers had left deposits, which are refundable in the case that the goods were not available then the SSGR would ensure the company could not defraud the consumer by claiming these funds as liquid assets and ensure that these funds were refunded, as if it were a case that a healthy company could not supply the goods. This is significantly different than insolvency law, which would treat all the creditors the same, i.e. the insolvency laws have indicated there is no preferential treatment between creditors, however in the Re Challoner Case it specifies that this preferential treatment cannot occur amongst creditors of the same class. Although this is respect to goods the same principles are becoming and essential part of providing services. In addition the company and the director's will soon owe a duty to shareholders as well as consumers. The general duty that the director holds is to the company, which has been established through the law of equity, which will be further discussed in the next section. In relation to contracts that personally benefit the director under contract law the company can make it avoidable as it is in breach of the basic duty that the director holds, which is implied in the present Company Acts. However there is the provision that if the director declares to the board his personal interest, at the soonest possible time, then if the board approves the contract then this contract is valid. This is not the extent to which parliament has legislated director's personal interests in contracts as can be seen in the CA 1985. Section 317 of the CA 1985 has been briefly touched upon in his declaration of personal interest in the contract, yet the legislation goes further to define how and what the director must declare. This includes the nature of the interest; whereby a general notice of interest in a company or with a specific person is sufficient notice; however only the agreement from the board in full knowledge of an interest will save a contract from being avoided, otherwise contract law will allow the contract to be avoided. If the interest is financial, rather than just a connection with a person, then the director must make a declaration to the accounts; hence strictly regulating not only direct contracts but also indirect or casual transactions.

There are certain exclusions which include; transactions within the company group; or a service contract between a director and its company; as well as financial transactions which are below the limits set out This duty held to the shareholder has been a question of concern in the new CA 2004; whereby the protection of director's liability has been slackened and the powers of investigation into possible wrongdoing, negligence of acts and/or omission of acts will be strengthened. These changes in the law seem to point to ensuring that directors will act in a fair-spirited manner towards the interests of the shareholder. Therefore the actions of non-compliance may not only lead to sanctions from the FSA but leave the company open to civil suits from customers and shareholders.

Lack of Operations Director:

Also the fact that there is no Operations Director may be a breach of the regulations governed by the FSA. This is because if it can be shown the administration process of the company has been slowed up without the Operations Director and customer's are losing money due the fact then the customers can complain and get the FSA to act. If the two ingredients of slow administration and the customer loss of money are not present then there is no action that can be taken by the FSA.

Staff Retention:

In the same lines of argument the problem with staff retention may also pose a similar problem; whereby the change in staff can slow the administration down causing customers to lose money. There is an added problem in respect to staff turnover where the staff has to be adequately trained, if the staff does not have the required qualifications as set out by the FSA then the company and the staff member is open for prosecution and fines/sanctions by the FSA. These are very important rules especially in respect to the money laundering and financial crime regulations, but also in respect to customer satisfaction and dealing with customer complaints. The following is a list that the FSA indicate are the possible scenarios where the customer can complain about an organization of the financial services:

unexpected or excessive charges;
losing money because of a firm's slow administration;
a dispute over who is at fault if money is stolen from an account;
incorrect or misleading information about a product;
a firm's failure to adequately warn about the risks of a product;
a firm's failure to draw attention to a particularly strict condition in the contract;
a firm's failure to carry out your instructions;
unfairly being offered worse terms than other customers;
not being given adequate notice about changes to a contract.

Therefore if the staff is not adequately trained then this will leave rise to civil action from customers, also it effects the reputation of the organization which is a major factor for those in the financial services. This is because when dealing with the financial markets the company is closely tied to the listing practices where reputation is a major factor. If one considers that if a company that invests money for its consumers has a bad reputation how can it meet up to the standards that are required for the companies it will be investing in. This is especially important in an era where financial crime is a major fear. The following section will consider the rules surrounding listing and reputation and then apply it to the problem that this company is facing.

FMSA and Listing Rules - Reputation:

The listing rules are contained within the Financial Services and Market Act 2000, which brought all the regulatory bodies within the financial market together under the heading of the FSA. This body deals with all areas of regulation from vetting approved individuals to deal in the financial sector to investigating financial crimes. Included in these duties is maintaining a competent and complete listing of securities that is in line with the EC Official Listing of Securities Regulations 2000 (SI 2000/968) There is no requirement for new companies to be officially listed; however being listed indicates a certain standard and financial history of the company, i.e. it is a reputable company and the individual's money would be well invested in the company. Company C listed their company and the future sale of shares therefore indicating they have reached the standard as approved by the competent authority; however the company is now under obligations in respect to the validity of their listing and if they do not maintain these obligations, then it is possible that there status will be revoked or suspended; as well as possible prosecution for any financial crime committed. The obligations, with respect to the listing, include full disclosure at the time of listing; and disclosure of any information that will affect the shares subsequent to the listing as per sections 80 to 83. If a company individual may have made full disclosure at the time of the listing; however has failed in his obligation by not disclosing the change in circumstances, i.e. the knowledge that the company will not be able to branch out in the area of railway safety. Therefore in breaching this obligation the result could be possible cancellation or suspension of the listing, in addition if a director that knowingly participated in this scheme he could be subject to additional financial penalties for not disclosing the subsequent particulars; which could equate to misleading particulars as the listing was based upon expanding the company in the area of railway safety as per section 91 of the act. In addition there is the additional responsibility for compensation by those who have provided false and/or misleading particulars to pay compensation to those who have suffered due this misrepresentation. Therefore this results in some remedy for the person who suffers from this act, in the form of monetary compensation and justice.

The FSMA 2000 also deals with the expansion of the insider trading laws to include all legal entities, include companies and corporations. Therefore there is the possibility that the company can be prosecuted because it is liable for its managing director's actions, because all though this criminal act requires mens rea all that the prosecution has to show is that the illegal act was done by the controlling mind of the company In the case of a managing director this is proven because he would be considered a controlling mind and the company could also be facing prosecution and the possibility of owing compensation for the actions of the director; the problem in this situation is that there is no director and the actions are due to incompetence or ignorance. The investigations into insider trading and failure to disclose pertinent subsequent information about listings are monitored by the FSA and the London Stock Exchange; therefore the powers of these two organizations will be considered, with reference to past investigations.

The FSA after the enactments of the FSMA 2000 became the single regulatory body, therefore investigates any dealings that are suspicious in the financial services sector. This body can fine companies and directors for non-compliance, for example in the investigation of Universal Salvage Plc (Universal) the FSA fined the company 90,000 for breaching the listing rules by failing to notify about a loss of a major contract. Also the Chief Executive Officer Mr. M.C. Hynes was fined 100,000 for being knowingly concerned in the breach. In this case the director of enforcement stated that:

The delay, and therefore this enforcement action, could have been avoided entirely by the taking of responsible preparatory measures by the company when it first emerged that the contract might not be renewed. Mr Hynes was aware of this development and was the director best placed to ensure that Universal complied with its obligations under the listing rules.

The power and legality of the FSA's decisions and compliance with has been confirmed in the High Court; therefore if a company or individual ignores the decision made by the FSA imprisonment may ensue if the company's controlling mind or the individual does not comply. This is very important to ensuring that the rulings of the FSA are not only complied with, but it deters companies from acting dishonestly, negligently or sloppy in respect to listings as it does affect the average shareholder even if it brings profit to the company or individual directors. The hard line taken by the FSA can be seen in the Marconi Invetigationwhereby the company failed to keep their listings up to date, which was simply sloppiness however may harm shareholders and in respect to the duties owed this cannot occur:

In this case a major listed company failed to provide important information to investors on a timely basis. We require companies to keep the market informed of price sensitive information without delay so that investors can be sure they are making financial decisions based on the most up to date information.

Therefore in respect to the likelihood of a fine for being knowingly concerned in not advising of the change in circumstances is high; also the company would also be fined. The actions that are more than the mere listing, with this information he used it his advantage and dealt in the shares by selling his at the highest price in the knowledge that they would drop. This is an example of insider dealing, which is a serious crime that is under the umbrella term of market abuse; whereby the FSA holds powers of prosecution. In the case of the Sema Group a director was faced with imprisonment for selling his shares prior to news announcing results that would cause a plummet in the share price.. However the obligations that the company owes to its shareholders and potential consumers of shares is so strict that the code of obligations (also known as the Model Code) that if there is a situation arises that there may be a breach of its spirit, then the situation surrounding announcing results must be adhered to:

This prohibition applies whether or not the director who wishes to deal is aware of the price sensitive information concerned. In addition, the Model Code allows the chairman or designated director the power to refuse to grant clearance if he thinks buying or selling shares at that time would be in breach of the spirit of the code.

Summary:

Reputation is the key to the financial markets and organizations and without proper adherence to ensuring that reputation is protected then the risks that the financial organization is open to great. Although the problems that our company faces are not so grave there are lessons to be learned about the essential nature of reputation; therefore if the lack of an Operations Director effects the company's reputation serious actions have to be taken. The policy that has been recently introduced will be affected from the lack of operations supervision and therefore the possible negative effects have been exacerbated. Therefore the main actions that need to be taken are the implementation of an Operations Director, a re-look and re-education of the new policy. The new policy has to be efficiently implemented without causing loss for existing customers, i.e. the administration of the company has to be efficiently monitored and goals for customer service need to be implemented. Also the staff need to educated on the policy and reassured; as well as schemes to raise morale. At the same time the qualifications of the staff need to be monitored to ensure that all FSA standards are met, especially in an atmosphere of high turnover. Also staff retention has to be closely monitored because staff changing hands all the time will slow down the efficiency of organization's efficiency. There will be conflicts from implementing these measures, first of all in the organizational hierarchy because the lower management has been able to create their own rules, which a new Operations Director will challenge. In addition there will be a conflict in respect to any staff that does not have adequate qualifications; whereby they will have to be let go or put in to a position where they can legally work which inevitably will be paid lower. In keeping the new accounts policy may lead to two sets of conflicts - the existing customers and staff; however without proper evaluation, i.e. in a properly run organization it is difficult to determine whether the policy is the problem or the lack of proper organization in respect to customer operations. Finally, if the new policy does not meet the standards of the FSA then this will be in breach of compliance; however in December 2004 the FSA deregulated the standards for accepting customers therefore this is highly unlikely. Therefore any breach will have to be on the grounds of customer service/complaints standards, staff qualifications and/or reputation grounds. In short the new policy I believe has less to do with a compliance matter but the running of the customer service operations because we are not providing the level of service that the customer expects, also the lack of organizations opens the company up to possible cases of financial crime, fraud and breaches in Data Protection. The following chapter will briefly discuss the operational risks that we presently open to and the actions needed to be taken to ensure that we are fully compliant with the FSA as well as ensuring that our reputation is restored at the same time as opening up out customer base.

Chapter Two - Organizational Risks & Controls/Actions to be taken:

Organizational Risks:

The main organizational risks that the current situation poses are:

Sanctions/actions from the FSA with respect to the lack of organizational structure if it can be shown that the customer is losing money to slow administration
High staff turnover could lead to breaches in staff qualifications and the slowing of administration on the basis of customer service
Lack of organization and high staff turnover opens the company to possible breaches in Data Protection, cases of financial crime and fraudulent acts against the company and/or customer
Customer complaints have resulted in loss of reputation which may lead to FSA investigations but most importantly the loss of confidence in the organization may render the organization unable to work in the financial services market.
Implementation of a new policy's negative effects have been exacerbated by the lack of organization and therefore resulted in the lack of confidence in the new policy.

These risks are major risks which have resulted from the lack of an Operations Director rather than the implementation of a new policy and actions need to be taken for these risks to be neutralized and the company be fully compliant with the codes of practice in respect to customer confidence and satisfaction.

Controls/Actions:

The following controls and actions need to be taken to restore confidence in the company and to retain the new account acceptance policy:
The employment of a new Operations Director
An audit of the customer operations policies and the introduction of an efficient customer administration system
A customer system of compensation/apology for those who have lost money due to the long and inefficient customer service/administration
An audit of all employed staff and ensured all are properly qualified and severance of those who do not meet the required standards
For all staff that meet required standards a staff retention bonus system
A policy promotion of the new customer acceptance standards properly delineating the benefits of a wider customer base and the re-iteration of the liberalizing of standards by the FSA. Therefore in the best interests of the staff; customers and organization a wider customer base should be reached to maintain a competitive and reputable financial services organization.
An overhaul of the customer complaint system, i.e. if customer's felt that there concerns were properly addressed about a new scheme/product efficiently within the FSA guidelines then customer satisfaction and reputation would be restored.
Finally a customer retention programme, i.e. a bonus scheme
Not all these actions and controls are to do with compliance but will promote compliance because otherwise the organization's reputation will continue to fall and disabling its ability to work on the financial markets, as the discussion on the listing procedures illustrated reputation in today's fear of financial crime is essential.

Summary:

The main problem with compliance is in relation to lack of organization without the control of an Operations Director. As the opening discussion in Chapter One illustrated without a sufficiently responsible and liable individual corners will be cut. In other words if a director is employed he owes a duty of care to customers and shareholders and if his actions open up the company and himself to civil and criminal actions; therefore ensuring accountability and efficiency into the organization. Therefore as the policy is fully compliant with the new FSA deregulation of customer acceptance standards this should be continued to be implemented as it is more likely that the problems arise from organizational problems. On the other hand, if the policy continues to cause problems then it should cease; however this will cause a major conflict with the customer base.

Bibliography:

Kern Alexander, 2001, Insider Dealing and Market Abuse: The Financial Services and Markets Act 2000, ESRC Centre for Business Research, University of Cambridge, Working Paper 22, University of Cambridge

J. Beatson (1998) Anson's Law of Contract 27^th Edition, Oxford, Oxford University Press

N. Bridge, 2004, Directors Behaving Badly, NLJ 154(7129)

Charlesworth and Morse, 1999, Company Law, Sweet & Maxwell

P. Craig, G. De Burca (1999) The Evolution of EU Law, Oxford, Oxford University Press

Europa, the internet portal to the EU: SSRG 2002 s.2

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