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Investment business: keeping on the right side of compliance


Published: 01 Mar 2022 Update History

Complying with the DPB (Investment Business) licence requirements needn’t be onerous if you follow some simple good practices. We look at the common problems that come up during ICAEW quality assurance monitoring visits, and offer tips to make sure your firm doesn’t make the same mistakes.

Firms that hold a DPB (Investment Business) licence must comply with a range of requirements. These are laid out in the DPB (Investment Business) Handbook, and most are relatively simple and straightforward. There are, however, several areas where firms regularly fall down.

During ICAEW quality assurance monitoring visits, similar issues tend to crop up each year. One of the most common mistakes is that firms either fail to carry out an annual review of how effectively they comply with the handbook, or they fail to document their review. This review is important to ensure that firms are meeting all of their obligations under that Handbook and to avoid any unpleasant surprises during a quality assurance monitoring visit.

“Sometimes firms that are not carrying out any exempt regulated activities (ERAs) mistakenly think they don’t need to do this annual review because they’re not actually carrying out any activities under their licence,” says Dean Neaves, Senior Manager, Quality Assurance Department, ICAEW. “But this is not the case; they still have to do the review, regardless of the activities they’ve carried out in practice.”

Because the review is designed to assess the firm’s procedures and check it has identified all activities that fall within the scope of the licence, documenting the process is critical. “Firms might say they’ve done it,” says Phil O'Halloran, Case Manager, ICAEW. “But then we find they haven’t documented it, and without the documentation you can’t prove you’ve done it, and that you’ve done it properly.”

Another common problem is firms mistakenly believing they can rely on the completion of their ICAEW annual return as a proxy for doing the review. “But, again, they can’t do that,” O'Halloran explains. “Every firm that holds a licence, even a very small firm or sole practitioner, must still complete an annual review.”

Whole firm review

An annual DPB compliance review has three parts. The first of these involves a ‘whole firm’ review, and for this you need to document:

  • competence – have you got the ability and training necessary to comply with the handbook requirements
  • professional indemnity insurance (PII) – have you got the requisite insurance
  • continued eligibility – are you still meeting the eligibility requirements to hold a licence

With PII, firms can sometimes fall down on the level of cover. “If they are carrying out insurance distribution activities under their licence, such as a regulated fee protection insurance scheme, then they need to have an additional level of PII cover to enable them to do that,” explains Neaves. “And this will be over and above the normal ICAEW minimum requirements.”
Continued eligibility is another area where firms often make mistakes. Usually this arises where firms appoint non-members as new principals and fail to get ICAEW DPB affiliate status for them. “This is probably the single most common issue we’re seeing,” says O'Halloran.

A complete picture

The second part of the review involves checking that any regulated activities have been conducted in the manner required in the Handbook/legislation so that they constitute exempt regulated activities. “Firms need to ensure they’ve got a complete picture of what they’re doing,” says Neaves. “This is likely to involve discussions with fellow principals and staff to ensure they’ve captured everything.”

Under the DPB licence, firms conducting ERAs must make certain standard disclosures to any client. These include status under the Financial Services and Markets Act 2000, compensation arrangements andcomplaints procedure information. “If you’re carrying out ERAs, you need to ensure you’ve included appropriate disclosures in client engagement letters,” explains Neaves.

“You also need to make sure you’ve picked up issues such as regulated referral fees or commissions,” he adds. Some firms, for example, fail to make it clear when they are making regulated introductions. “We often see that cropping up in reports,” says O'Halloran. “Firms may not be properly and transparently distinguishing between regulated and non-regulated referrals. And this can go hand-in-hand with them not accounting for commission properly.”

Targeting risk

The third part of the annual review involves file reviews. Firms should select a sample of relevant clients for file reviews to check these complied with the requirements of the handbook.

“Even where you don’t think your firm has conducted ERAs, you should be carrying out file reviews to check no one has inadvertently strayed into these activities,” says Neaves. “If you’re a sole practitioner who doesn’t carry out any ERAs and undertakes all the work yourself, we don’t mandate file reviews, although we still do say it’s a good idea.”

File reviews have their own pitfalls. “Sometimes, firms only select files where they know they carried out ERAs,” says Neaves. “Of course they should look at these files, but they should also select files where they believe they haven’t conducted ERAs. This allows them to check that such activities haven’t occurred inadvertently on those files where corrective action may be needed.”

Firms need to be targeting risk when they select files, rather than taking a random sample. “Choose files where there are more likely to have been ERAs, for example personal tax clients with high net worth” advises Neaves.

In multi-partner firms, it’s particularly important that file reviews cover all the partners potentially carrying out ERAs. “If you can’t do that every year because of the large number of partners, you should cover each partner at least every three years,” says Neaves.

File reviews also help you check your firm is not straying outside ERAs into regulated activities that require Financial Conduct Authority authorisation. “If you look not just at documented work, but also the correspondence on a file, that’s typically where you might pick up instances where someone might have strayed,” Neaves suggests.

A checklist tool

Once the review is complete, firms need to summarise what they’ve found. “If you are a sole practitioner, this can be quite brief,” says Neaves. “But where you’ve found gaps in procedures, you should put together an action plan to remedy the position. You also need to implement the plan. If action points are left hanging, it renders the review ineffective; it’s important to follow through.”
To help firms carry out reviews that capture all the information required, ICAEW has produced a checklist. “We recommend using this, or a similar checklist,” says Neaves. “Firms that don’t use a checklist may miss some of the important requirements.”

It’s important to view checklists as active compliance tools. “You can’t just roll forward the same checklist year on year under the assumption that nothing has changed,” he adds. “This isn’t a tick box exercise.”

“If you use the checklist properly, the compliance review shouldn’t be onerous,” he concludes. “You need to think about what services you provide, what your firm is doing, and how that fits into any licensed areas. If you approach it in this way, the checklist will help protect you, and ensure you always remain on the right side of compliance.”


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