The importance of Systems & Controls
The current ‘rogue trader’ story at investment bank UBS is likely to raise serious questions about their Systems and Controls to prevent this sort of thing from happening.
It’s over 15 years since the former derivatives trader Nick Leeson brought down Barings Bank through unauthorised speculative trading.
Unauthorised trading which generates massive losses (the initial estimate of losses at UBS are $2bn) is usually the combination of poor judgement or criminal intent on the part of the individual trader and lack of proper oversight by the management.
Part of the Financial Services Authority (FSA) Handbook, which all FSA authorised and regulated firms must follow, looks at Senior Management Arrangements, Systems and Controls.
The FSA has often fined firms for their failure to demonstrate sufficiently robust systems and controls. We would not be surprised if a future FSA fine for UBS adds further financial pain to the unauthorised trading losses allegedly generated by its trader Kweku Adoboli.
The BBC is reporting this morning that Adoboli alerted UBS to the unauthorised trading, rather than UBS discovering it for themselves. This is unlikely to help UBS when they plead their case to the FSA.
It is easy to understand why Senior Management Arrangements, Systems and Controls are so important for large investment banks, where the financial damage or consumer detriment resulting from poor controls can be significant. They also need to apply to smaller businesses, including IFA firms.
Here at Informed Choice, we document our Systems and Controls and publish these within an Operations Manual which is shared on our secure Intranet site. This Operations Manual is accompanied by a series of Standard Operating Procedures which set out our requirements for how things should be done.
Unlike most other IFA firms, we apply a team approach to the construction of advice and this means that several members of the team are involved in each piece of advice we deliver to our clients.
We believe the traditional IFA business model, where one individual is often responsible for the construction and delivery of advice to an individual, can be very risky and lead to unsuitable advice remaining undetected for lengthy periods of time.
Another point of difference between our Systems and Controls and those of most other IFA firms is that we check every single file for suitability, both before advice is presented and once the activity has been completed.
This 100% file checking for suitability differs from many other IFA firms, particularly some large IFA networks and national firms where file checking is often applied only a small percentage of files or only to higher risk advice areas.
In order to restore trust and confidence in the financial services sector as a whole, every regulated firm needs to apply robust Systems and Controls.
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