[Fulltext] Now that the ICAI Investment Business Regulations have been approved by Government, are there common problems or issues being identified in monitoring visits which practising firms need to be aware of? Aidan Lambe, an Inspector with the Irish Monitoring Unit, outlines some common pitfalls and offers some practical advice. The Institute's Investment Intermediaries Act (IIA) Regulations received approval from the Central Bank of Ireland in April 1999. The purpose of these Regulations is to ensure that firms always provide a service which puts the clients' best interests first; is within the professional competence of the firm; provides for clients' assets to be held apart from those of the firm; and is properly recorded and documented.
The Regulations are complex. However, there are a number of key requirements, which if kept in mind by firms when providing investment advice, will go a long way towards demonstrating compliance with their requirements. Most of these are not new in terms of how a Chartered Accountant is expected to approach his/her everyday work and should be well within the competence of the Chartered Accountant in practice who carries out that work with integrity, objectivity, transparency, independence and in the client's best interests.
Investment Instruments and Investment Advice
Quality Review visits have shown that firms do not yet fully appreciate the scope of the Regulations. The Act contains wide definitions of 'investment instrument' and 'investment advice' and most firms visited appear to have given advice coming within these definitions. This may simply be advising on where a client should place surplus cash on deposit; referring them to another Authorised Third Party e.g. a stockbroker; talking to them about whether to invest in the latest State privatisation; or forwarding a selection of BES brochures or brochures on other 'tax efficient investment schemes'. The most common issue arising on visits is that firms have failed to establish appropriate procedures to ensure compliance with the Regulations. This is required by Regulation 2.32. The extent of these procedures will depend on the type of investment advice offered by the firm and its category of authorisation. A firm that is actively conducting investment business will need to ensure that, as a minimum, the following areas are addressed.
Documentation
Before recommending a particular investment to a client, the firm should obtain and record information on the client's personal and financial situation, establish the client's investment objectives e.g. income or capital growth, and their attitude to risk. This is to assist the firm in reasonably satisfying itself that the investment being recommended is suitable in terms of fulfilling the client's needs. This 'suitably' requirement is addressed in Regulation 3.29. The IMU experience to date indicates that firm's have been weak in formally documenting relevant issues in relation to this requirement. This is not to suggest that firms are unaware of relevant factors to be considered. The key phrase above is 'obtain and record'.
Engagement Letters
The firm should then issue an appropriate engagement letter to the client. The clearest way of demonstrating the client's agreement to the firm's terms is if the client signs and returns this letter. Within the general engagement it may be possible to include a paragraph covering miscellaneous advice, which may not necessarily be acted upon by the client, throughout the year. It should, however, be noted that for any specific investment business advice or transaction a firm must issue a new engagement letter each time the work is undertaken. Regulation 3.15 details the minimum content. The Institute's Quality Assurance Department (QAD) has recently issued a 'standard engagement letter booklet' to all authorised firms. This provides practical and useful guidance on the circumstances where letters should be issued and their contents by providing worked examples of common scenarios likely to be encountered.
Recording advice given
Regulations 3.30 to 3.34 address the recording of advice given and ensuring that clients are provided formally with appropriate information, including 'reason why' letters, product details, and risk warnings. Often, the simplest way to demonstrate compliance with these requirements is in the 'reason why' letter required by Regulation 3.30. Some firms have been unable to provide evidence as to how they have met these requirements. As well as not issuing 'reason why' letters, firms' records have not contained evidence that adequate risk warning was given to clients.
Commissions
Another area where firms should ensure full compliance is with regard to disclosure of commissions earned. It is important to obtain the client's written consent to retain commission. Regulations 3.23 and 3.24 address this area. However, these are not a new concept. ICAI's Ethical Guide requirements on commission have existed for some time (Statement 4, paragraph 3). Firms who have not complied with these rules have been required by the Quality Review Committee to make retrospective disclosure of commissions.
Role of the Investment Business Compliance Partner
The role of the investment business compliance partner is central to ensuring that appropriate procedures and practices exist which enable a firm to comply with the terms of its authorisation. In a partnership, it is common for partners to service their own clients, particularly those who are non-corporate. All relevant individuals must be sufficiently aware of the requirements of the Regulations and procedures should be applied uniformly throughout the firm for any investment business conducted. To this end, the Investment Business Compliance Review required by Regulation 2.34 should be carried out annually by the compliance partner.
IMU has attempted to use Quality Review visits as an opportunity to provide as much guidance as possible to assist firms with future compliance with the Regulations. A visit can be used to assist with devising appropriate investment business procedures.
The Institute has regulatory responsibilities under the IIA but it also has a responsibility to support and assist its members. This is yet another set of Regulations for members to grapple with. The Quality Review process has attempted to continue the educational and constructive approach previously associated with the 'Practice Review' system in an effort to help firms cope.
Accountancy Ireland Vol 32 No 2 April 2000.