Sloppy practices evident in investment sector

On Friday the Central Bank issued a note to the effect that the regulatory returns submitted to it by many authorised investment firms, fund service providers and stockbrokers were not up to snuff. There were no capital breaches but some level of error is believed to have been found with the returns of a large number of firms.

This followed a review of about 35 per cent of the 400 or so firms that fall into these categories. It included both a desk- based review of the regulatory returns data and on-site inspections of the finance function at some of the firms. The regulator said a “number of the firms had inadequate or no procedures for the production of regulatory returns”. This resulted in a lack of proper controls and oversight in the production process.

Relevant staff in some of the firms could not demonstrate “sufficient knowledge” of their regulatory reporting obligations or the methodologies used to calculate the necessary financial information contained.

“In some firms, financial reporting to the board and senior management did not include details of regulatory returns,” the Central Bank said.

It said authorised officers identified a number of misclassifications, discrepancies and omissions in the returns, in particular regulatory returns. It said this indicated a “potential lack of attention and importance given by firms to their regulatory reporting obligations”.

“It is imperative that each firm and its board fully appreciates and understands its obligation to ensure that all regulatory reporting to the Central Bank is complete, timely, accurate and in compliance with relevant legislation,” the regulator added.

The Central Bank said firms should have documented procedures for the production of the regulatory returns, which should be approved by the board and reviewed at least annually. In addition, all regulatory returns should be reviewed by a senior member of the finance function before being submitted.

The Central Bank also wants firms to ensure that all staff within the finance function involved in the preparation of regulatory returns have the necessary skills and training.

It reminded firms that the board should monitor the capital position of the firm regularly while periodic financial reporting to the senior management should include regulatory capital, providing the current capital position together with comparative figures and full-year forecasts.

The latest regulatory returns should also be included, highlighting key issues that arise in the production of the return.

The Central Bank stopped short of issuing any sanctions although it reminded firms that “where there is noncompliance with relevant regulatory requirements, it will have regard to these recommendations, when exercising its regulatory and enforcement powers”.

The Irish Funds Industry Association told me it has been working closely with the Central Bank to try and standardise and automate their members’ returns.

It also needs to be said that there are many within the industry who believe there is too much red tape for firms to navigate and a certain heavy-handedness by the Central Bank in dealing with breaches, even minor ones. These are cited as reasons why more and more small investment advisory groups are being squeezed out of the picture, or forced to huddle together for warmth.

“They nearly expect you to have a stenographer at board meetings to give a line-by-line account of the discussions . . . It’s gone crazy,” said a senior director.

Nonetheless, it’s quite something to think that six years after the financial crash here, when light-touch regulation failed us so spectacularly, such sloppy practices are still at play in the sector.

We hear a lot of guff from investment firms, fund managers and stockbrokers about their expertise and insight, their best-in-class investment solutions, their innovation and their astute advice and planning. Yet they can’t meet some basic regulatory reporting requirements.

It’s really not good enough.