The City watchdog, the Financial Services Authority (FSA), considered Wills & Co, the stockbroker that failed this year, as a ‘low impact’ firm not requiring monitoring three years before its collapse.
In response to a freedom of information request from Citywire the FSA has disclosed that although Wills & Co was fined £49,000 in 2007 for failing to outline the risks attached to penny shares it was selling, the regulator had rated the company as being in a low risk category not requiring specific assessment.
The regulator’s supervision of the stockbroking sector eventually led it to restart investigations into Wills & Co in 2009 and the broker formally went into default in July this year, with claims from clients now passed to the Financial Services Compensation Scheme.
The fact that Wills & Co was deemed a ‘low impact’ firm meant that even after its £49,000 fine in 2007, the company was able to carry on with its aggressive sales practices.
However, by February 2010 – some three years later – the FSA’s baseline and thematic supervision of the wider sector led to a supervisory visit, during which it found that the same failings identified in 2007 persisted.
At the time, FSA director of enforcements Margaret Cole said: ‘It is shocking that despite previous action, Wills & Co has failed to put its customers first... What makes this case particularly serious is that the firm was fined by the FSA and promised the FSA that its treatment of customers had improved when that was plainly not the case.’
When Citywire requested sight of any risk assessments carried out on the firm, the FSA responded: ‘As Wills & Co is defined as a low impact firm we would not carry out an Arrow risk assessment on them and therefore do not hold the information you have requested.
‘If a firm is assessed as a low impact firm, it does not have a specific risk assessment or risk mitigation programme. These firms are monitored by a combination of baseline monitoring, action in response to risks identified by this information, thematic exercises to monitor compliance standards in a sector and work as part of sector-wide reviews.’
FSA failure
The FSA’s handling of Wills & Co underlines the flaws in the FSA's approach in recent years. Having taking action against the broker for taking on lines of stocks and flogging them to investors in a fast and furious fashion it apparently took the company's word that this would stop.
While it is true that Wills & Co’s collapse is ‘low impact’ in terms of the wider financial crisis that has gripped the UK over the past three years, its impact on the reputation of stockbroking and the damage it does to investors' confidence is significant.