Self-Subverting Regulation 

It's been a little while since we had a rant here about the latest regulatory novelties, but our recent experience with the FCA's Gabriel system is salutary, in the way it highlights the kinds of unhelpful outcome that are an inevitable byproduct of the way the regulator operates in practice.  It may also be revelatory for anyone who, in an absent moment, may have toyed with the idea of direct authorisation.

Gabriel is an insatiable beast.  The human equivalent would be Mr Creosote, from Monty Python's Meaning of Life, and this is a sketch which is not for the faint of heart.  Historically, ValidPath have been subject to two six-monthly reporting periods, and those unfamiliar with the joys of Gabriel may wish to familiarise themselves with the informational demands that govern our yearly calendar:

Information required twice-yearly


Information Category

No. Pages

RMA-A Balance Sheet 3
RMA-B Profit & Loss 2
Section C Client Money & Assets 3
Section D-1 Regulatory Capital 4
Section E PII 3
Section F Threshold Conditions 1
RMA-G Training & Competence 8
Section H COBS Data 2
Section I Supplementary Product Sales Data 2
CCR002 Consumer Credit Data 2
RMA-J Data required for fee calculation 1
RMA-K Adviser charges 5
REP-CRIM Financial Crime Reporting     8
CCR-Complaints Complaints Return 4
Disp 1 Ann 1R Complaints Return 15
RIA-Complaints Complaints by Retail Investment Advisers 3

The challenge with Gabriel is not merely the volume of data it demands, but the pace of change in extending the range of specific data items.  A year ago, the 15-page Complaints Return was a fraction of its current size.  Inevitably, intermediary firms will always lag slightly behind the FCA's requirements, in terms of systems development and we accept that there is always going to be an element of catchup, but when a given form suddenly mushrooms, without prior warning, into a monstrous beast four times its original size - then that inevitably leads to a lot of overtime, given the nature of the reporting deadlines.  Deja vu is an inevitable part of the fabric of the thing:  we have lost count of the number of times we have had conversations with FCA staff, stressing the need for some advance warning of these changes, in the interests of ensuring the most reliable reporting.  We have worked on the principle that, assuming there is a value to regulatory reporting, then it would be preferable for the data to be accurate - but it seems that we have entered a 'don't mind the quality, feel the width' kind of world, and nothing ever improves.  I shudder to think of past occasions when FCA representatives have encouraged us to 'fudge' reporting data, simply to get their electronic forms to validate:  for the whole exercise to have integrity and value, everyone involved needs to have the same regard for the veracity of the reporting.  That common perspective is distinctly lacking.

Recently, we received a reminder for a periodic report (deadline 11/08/2017) which did not fit any of our schedules.  When we queried the matter, we were told that this was because ValidPath's annual turnover had exceeded a given tipping point.  We were pointed to the relevant section in the FCA Handbook which made this "absolutely clear".  It would be an interesting exercise for readers of this article to see how long it takes them to locate the relevant piece of guidance:  the FCA representative was correct, it is there!  More relevantly, and importantly, we had received no formal notification from the FCA that we had actually been moved to a quarterly reporting schedule - you would think that something that important would require highlighting in some way due to the following implications:

  • It changes our annual processes (switching them to quarterly), introducing new commitments and deadlines
  • It has significant cost implications
  • It raises implications for the ways in which we account for capital adequacy, and might conceivably interact with shorter-term fluctuations related to massive overheads such as FCA Fees
  • A quarterly reporting schedule raises inconsistencies with the ways in which accounting software handles the data
  • It has implications for our working relationship with our software provider, in order for us to arrange for new reports and new data to be available
  • It is entirely possible that the increased frequency may have practical ramifications for our Members - we don't eke out our existences in hermetically-sealed silos
None of these items are of minor significance.  All of them have the potential to unseat previously adequate systems and controls, and thereby completely undermine the very objectives that the FCA purports to hold dear.

Some closing observations

  • Completing the Gabriel return is a labour of love - the kind of thing one does for other people, but would never, in a million years, choose to do for oneself
  • The quality of our data is important - as advisers, our focus should be on the precision and veracity of what we work with, in order to achieve the best possible outcomes for our clients
  • ValidPath are heavily dependent upon our Members using their systems correctly, in order to report their business activity - this is why we try to be proactive and clear in terms of our expectations, notifying you of any changes prominently, and well in advance
  • If a thing is worth doing well (like regulatory reporting), then it's worth doing collaboratively
Kevin Moss, 02/08/2017