That risk level is increased if the business is a QFE (Qualifying Financial Entity) as in addition to all the normal laws applicable to doing business, there is the multitude of legislation, regulation and codes that control the financial services industry. Add to this a ‘super regulator’ in the form of the FMA, which has extraordinary powers, and it is a potentially dangerous cocktail for those within a QFE who do not take their governance and management functions seriously.
All current QFEs invested significant time in developing their initial ABS and obtaining their QFE status. However, Strategi has identified that a number of QFEs have reverted to BAU (business as usual) and this is resulting in a widening discrepancy between what is recorded in the ABS and what is happening in reality. In addition, the business has evolved since gaining QFE status and this evolution is not appropriately captured in subsequent ABS versions, nor is it notified to the FMA. The penalties for these discrepancies can be severe. There could potentially be fines of up to $300,000, or worse the FMA may alter the conditions of QFE status and impose a number of onerous additional obligations which can increase costs and reduce revenue.
Strategi recommends a QFE not wait until it is visited by the FMA. At that stage, it could be too late to avoid some form of penalty, or at best to go onto the FMA ‘higher risk’ list. It is recommended that QFE directors and senior managers be proactive and insist upon regular external reviews of the QFE, its ABS, and spot checks to ensure staff in financial advisory roles are compliant. Instigating external reviews is a good start but taking action to rectify any identified issues is good governance and prudent management.
Strategi offers two QFE review programmes. The first is a full standalone review of the entire QFE operation. This package, called ‘QFE SystemsReview’, is most suited to smaller QFEs with fewer than 200 staff. It is usually performed annually but QFEs that are undergoing significant change may require it to be performed six monthly until the change/transformation process is completed. The key deliverable of QFE SystemsReview is a detailed QFE risk management plan that outlines where the QFE is not compliant, the implications of non-compliance and what needs to be done to rectify the issue. The management team either undertakes the remedial work themselves or engages Strategi to provide assistance and guidance along the way.
The second review programme is ‘QFE Consult’. This is usually a review of a specific sector within the QFE. The most common QFE Consult assignments relate to Strategi being engaged to:
- Work with the board of directors to implement appropriate QFE governance and monitoring functions.
- Assist the QFE to remedy issues identified by the FMA as part of an FMA monitoring visit.
- Proactively work with QFE management (as a result of the FMA issuing a guidance note on a specific topic) to review current processes and design and implement revised processes to meet the expectations outlined in the FMA guidance note.
- Review what is perceived to be the higher risk sectors of the QFE operation.
- Review the in-house compliance team and its processes, and conduct a sample check on staff/advisers to ensure that the in-house team are providing the required level of compliance.
The QFE Consult report is provided directly to the board and managing director. In a number of instances, Strategi will be engaged to provide additional training to the in-house compliance team.
Summary
- Directors and senior managers of QFEs are potentially at risk and must exercise good governance and prudent management.
- A QFE may evolve and its ABS and systems may lag, resulting in the business becoming non-compliant.
- Utilise external reviews conducted by Strategi Ltd.
- QFE SystemsReview is used by smaller QFEs with fewer than 200 staff
- QFE Consult is used by larger QFEs and targets a specific area of the QFE.
For additional information please contact David Greenslade
