UK: FSA Disciplinary Proceedings carry warning for foreign and new businesses.

The FSA fined MLP Private Finance Ltd, a subsidiary of a German company, GBP100,000 for regulatory failings in its life assurance and investment policies business. According to the FSA, MLP"s advisers were trained to sell endowment policies to meet the needs of long term savings (usually for future house purchase) and pension provision when alternative products were available to meet such needs more appropriately. These apparently formulaic recommendations were unsuitable. In the FSA"s view, the failings arose from MLP"s attempt to adopt the business strategy of its German parent without giving adequate consideration to the unique features of the UK financial services market and UK regulatory requirements.

The problems arose from MLP"s failure to monitor its investment staff and failure to put in place effective controls to assist this monitoring, the FSA said.

So, why is the case significant?

First, it shows that the FSA is paying close attention to new companies, including subsidiaries of foreign regulated businesses.

Secondly, compliance officers in subsidiaries of German Banks frequently voice the complaint that they wish to undertake stronger compliance than their head office will let them: they say that head office says that they should comply with German law and regulation. A number have voiced their concerns that FSA regulation is more stringent than German regulation and that meeting German standards is not good enough, but have had limited success. Whether or not this is the case in relation to the company concerned is not known but the FSA's own comments give an indication of their way of thinking: "a formulaic approach to customer recommendations resulting from a failure , properly to assess and research the UK financial services market and, as a result, a failure to take appropriate steps to comply with regulatory standards in the UK," and "MLP had failed to research UK regulatory standards thoroughly and, as a result, did not establish and implement appropriate compliance systems before commencing operations."

Third, the case shows the dangers of trying to build a business in a short time without ensuring that the proper infrastructure is in place: the FSA clearly will not tolerate compliance being put on the back burner whilst the business grows.

Fourthly, the FSA was concerned as to the company's target market: seeing fresh graduates as vulnerable, the FSA said that the company's compliance procedures needed to be of the highest quality. And they were not. So, the result was that inexperienced and unqualified staff wrote policies which were not subsequently checked by compliance personnel. This demonstrates the importance of the duty of supervision.

The UK has been undergoing a significant campaign to reduce the number of unsuitable endowment mortgages sold and has begun to demand that insurance companies review existing cases to ensure that they are appropriate. A similar process relating to pension policies, actively promoted by the government in the early 1990s, but later interpretation of the rules meant that many decisions were seen as bad. For the companies concerned the real lesson was that the compliance function had not been properly undertaken and that record keeping of the reasons for the sale was inadequate leading to a presumption that inappropriate products were sold. It has cost UK insurance companies many millions of pounds.

The record keeping and training requirements for sales teams are different to those under anti money laundering regulations but the fact that such are central to the business is common to both areas.