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1. Complaints Reporting
2. Reporting Pension Transfers & Opt Outs - Rule change to COB 5.3.26 R
3. What is a ‘Pension Transfer’?
4. Risk Warnings & Disclaimers
5. Professional indemnity insurance waiver for smaller firms
6. Stakeholder, ‘Stakeholder Friendly’ and Personal Pensions
7. Investment advice under the microscope
8. Fees and VAT - guidance
9. Access to Financial Ombudsman Service – Non Regulated Contracts

Ladies & Gentlemen

Please find enclosed the latest compliance and industry news.

As usual, sit back and enjoy!

Kind Regards

ATEB Consultants

Which article applies to me?
Please use the following table to decide which article applies to you, if any:

	1	2	3	4	5	6	7	8	9
Directors/Partners
Compliance / A&O Function
Money Laundering Officer
Advisers & Trainees
T&C Supervisor
Pensions Transfer Specialist
Back Office

1. Complaints Reporting

Don’t forget you need to send your reports (Including nil returns) to FSA by 30th April 2003. See article 1 in last month’s newsletter for guidance.

ATEB view:

If you are late you will attract two things: A financial penalty and some unwanted attention.

Action required by you:

Ensure that you do not miss the deadline.

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2. Reporting Pension Transfers & Opt Outs - Rule change to COB 5.3.26 R

We will try and put this in plain English, however if you would like clarification, please call or email ATEB consulting. The new rule takes effect on the 1st May 2003. 

1. The ‘reporting’ rule only affects those firms that are authorised to conduct ‘Pension Transfer and Pension Opt Out’ transactions. (See article 3)
2. The new rule actually clarifies that IFA firms will need to report all ‘Pension Transfer and Pension Opt Out’ business every six months.
3. The ‘1%’ reference (within rule 5.3.26) means that unless IFA firms are writing absolutely ‘bucket loads’ of transfer business there will always be a requirement to report quarterly if you arrange business on any of the following terms: any pension transfer and/ or opt out business arranged specifically on an ‘execution only’, ‘insistent customer’ or ‘correspondence only’ basis.
4. ‘Nil returns’ are not required.
5. Unlike complaints reporting, there are no specific reporting dates, however most firms have sent in six-month returns in early January to coincide with 6 months after the end of the ‘transitional period’. The next six monthly returns will be July. Any quarterly returns will fall in April and October.
6. Interestingly Product Providers are being asked to submit returns every six months. I wonder if the FSA will match up the IFAs return against that of the provider? 
7. During the consultation process the FSA were asked to clarify ‘correspondence only’. These transactions as clarified by the FSA include ‘all of those non-advised sales where only information was provided’. Our initial interpretation of this is that transactions that are processed through your agency where no advice has been given, only information provided, must be included in this category.

ATEB view:

Ensure that you keep clear records for an indefinite period and are able to report accurately on time with the minimum of fuss. ATEB have reporting pro formas if firms require them.

Action required by you:

We believe that reporting rule (COB 5.3.26 R) was originally poorly written and the FSA had in fact initially wanted all pension transfer and opt outs reported (not just those arranged on an ‘insistent customer’ basis as originally stated) every six months.

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3. What is a 'Pension Transfer'?

1. ‘Pension Transfer’ and ‘Pension Opt Out’ transactions have special definitions in the FSA handbook and we would refer you to the Glossary for the full definitions.
2. As a quick guide you may wish to look at table, 1 below that shows which type of ‘Pension Transfer’ is caught by the rules and whether a report is necessary.
3. The transfer must involve ‘deferred benefits’ therefore; it excludes situations where there is an immediate vesting of benefits such as annuity purchase and income drawdown.
4. Unless the authorised firm has the scope of permission “‘Advising on pension transfers and pension opt outs’” and has a registered pension transfer specialist (CF24) then the firm is unable to conduct this class of business. If you feel you may have breached the rules, please contact ATEB for guidance.
5. Table 1 summarises when is it a requirement for the firm to have the “Advising on Pensions Transfers and Pensions Opt Outs” activity as part of its scope of permissions and whether a report is due.

Table 1

Transferred From	Transferred To	Scope Required?	Report Due?
Final Salary Scheme	* Personal Pension / Stakeholder / Section 32	Yes	Yes
Executive Pension	* Personal Pension / Stakeholder / Section 32	Yes	Yes
Section 32	* Personal Pension / Stakeholder	Yes	Yes
* Personal Pension / Stakeholder	* Personal Pension / Stakeholder	No	No
Final Salary Scheme	Final Salary Scheme	No	No
Executive Pension	Executive Pension / Final Salary Scheme	No	No

* Includes SIPP

ATEB view:

Ensure that if you are transacting this type of business a disciplined procedure is followed and/ or the FSA prescriptive guidance is referred to. ATEB clients will receive an updated version of the ‘Transfer and Opt Out’ detailed procedures as part of the next compliance manual (CPM) update. This will incorporate all rule changes.

Action required by you:

There are many well qualified and knowledgeable advisers who are offering sensible and pragmatic advice in this area. However, if the firms internal procedures are not up to date and or the Pension Transfer Specialist does not counter check against FSA rules and guidance IFA firms may be leaving themselves wide open for further criticism and future compensation claims.

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4. Risk Warnings & Disclaimers

No clients want to read a list of disclaimers and risk warnings but by excluding (or reducing) them IFA firms may be leaving themselves wide open. Here are some humorous examples of risk warnings and disclaimers used within other industries (we can assure you that these were issued)

On a helmet mounted mirror used by US cyclists REMEMBER, OBJECTS IN THE MIRROR ARE ACTUALLY BEHIND YOU In some countries, on the bottom of Coke bottles OPEN OTHER END  On Marks & Spencer Bread Pudding PRODUCT WILL BE HOT AFTER HEATING On Sainsbury's peanuts WARNING - CONTAINS NUTS On a child's superman costume WEARING OF THIS GARMENT DOES NOT ENABLE YOU TO FLY On some frozen dinners SERVING SUGGESTION DEFROST  On Nytol sleep aid WARNING MAY CAUSE DROWSINESS

The moral of the story is that risk warnings are becoming increasingly more important in today’s litigious society. IFAs are very keen to produce high quality correspondence and we can understand why they sometimes feel that they do not wish to concern or bother their clients with ‘surplus’ risks and warnings.

ATEB view:

Our view is simple. Until there is clear evidence that someone (for example the FSA) takes a more balanced view on the way in which client complaints and compensation are handled then ATEB would recommend IFA firms exercise greater disclosure of risks and issue of disclaimers. Equally, it is important that these are not hidden and that the client has the opportunity to understand any consequences.

Action required by you:

ATEB clients have standard risk wordings which form part of the suitability templates and we also have a list of standard risk wordings that can be adapted where ATEB clients do not use our templates. If you want more information on risk warnings and disclaimer contact us.

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5. Professional indemnity insurance waiver for smaller firms

As per our March Newsletter article 8, the FSA are willing to consider applications from small firms for PI waivers. The FSA have been busy behind the scenes and granted its first professional indemnity insurance waiver to a sole-trader IFA firm. The firm granted the waiver will not have to have PI cover until March 2004 as long as it maintains reserves of the higher of £160,000 or 15 per cent of its annual turnover. This is considerably higher than the £10,000 that IFAs are usually required to have in reserve.

ATEB view:

This is excellent news for those well organised IFA firms that have a good track record with complaints, have a healthy capital adequacy surplus and are confident that they have been meticulous in their approach to previous compliance.

Action required by you:

If you interested in applying for a waiver you are welcome to contact ATEB we may be able to help. We are currently preparing a waiver application for a small IFA firm.

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6. Stakeholder , ‘Stakeholder Friendly’ and Personal Pensions

Question: When is a stakeholder pension not a stakeholder pension?

Answer: When it’s a ‘stakeholder friendly’ pension.

ATEB believe that many IFAs are mistakenly treating ‘stakeholder friendly’ pensions as stakeholder pensions and consequently not fully justifying why they have opted against stakeholder. The marketing literature of the providers has not helped (umm….now where have I come across this before?). Stakeholder friendly are clearly personal pensions and IFAs should pay due regard to the following key rules.

5.3.16R The suitability letter in COB 5.3.14R must:

(a) In the case of a personal pension scheme, which is not a stakeholder pension scheme, explain the reasons why the firm considers the personal pension scheme to be at least as suitable as a stakeholder pension scheme.

5.3.28R Suitability of personal pension schemes: promotions to employees

When a firm promotes a personal pension scheme, including a group personal pension scheme, by means of a direct offer financial promotion, the firm must be satisfied on reasonable grounds that the pension scheme is likely to be at least as suitable for the majority of the employees as a stakeholder pension scheme and must record why it thinks the promotion is justified

The 3% of basic pay is something of a ‘red herring

Also, remember that just because an employer wants to pay 3% plus of basic pay into a personal pension, this does not circumnavigate the above rules, although ATEB are aware of situations where this has occurred. The 3% is something of a ‘red herring’.  We believe the confusion has arisen due to the exemption that existed prior to the stakeholder launch. The regulations did allow for exemption from the Stakeholder access requirements if an employer was already running a funded group personal pension scheme. However, exemption was subject to the existing scheme meeting a number of conditions, one of which was the employer must have been making contributions of at least 3% of basic pay.

Reasons why you feel that a personal pension may be more suitable than stakeholder could be charges, investment performance, administration, financial strength, other features such as waiver of contribution, life cover etc. You should remember however, that suitability is not a ‘one size fits all’ and you should be specific in your recommendations.

ATEB view:

You must apply the rules for a ‘safe harbour’.

Action required by you:

You may wish to consider tightening up your procedures. Speak to ATEB if you are uncertain.

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7. Investment advice under the microscope

This article is particularly relevant to firms, which conduct sizeable lump sum investment business.

The Myners Report issued in March 2001 recognised that asset allocation is the major contributor to returns in a global portfolio, as opposed to market timing and stock selection. It is also becoming increasingly clear that all aspects of client risk profiling and risk assessment (see Article 3 ATEB newsletter Dec 02), asset allocation, and fund selection are accounted for, along with comprehensive reporting and portfolio rebalancing provisions.

Key elements of accepted portfolio theory which were highlighted by the Myers Report were:

• Asset allocation is the major contributor to investment performance. A study by Brinson, Hood and Beebower, confirmed in later studies, demonstrated that over 90% of investment returns in a global portfolio were directly attributable to asset allocation policy. Other academic studies consistently support this conclusion.

• Diversification across asset classes reduces risk to a greater extent than it affects returns. Via Markowitz’s pioneering work in the 1950’s to Sharpe in the 1960’s (they shared the Nobel prize for their discoveries) and consistently demonstrated since, it is clear that by carefully matching assets which have different patterns of price behaviour, portfolios can be constructed which provide required returns without excessive risk.

Portfolios should be client focused - built to match both the client’s aspirations and attitude to risk. Furthermore, there should be transparency in the fund selection process, and recognition that re-balancing is vital in order to maintain that risk/reward trade-off.

It is generally accepted that IFAs need user-friendly investment tools, quality administration and robust support services in order to offer the highest level of professional investment advice and achieve the above. Those tools and services can be provided efficiently through an “IFA only" web-based environment that is free and easily accessible. Many IFAs have found the ‘Selestia’ system very useful in this respect. However, you should remember there is no shortcut to meeting compliance requirements and that all ‘know your customer’ information should be considered carefully before deciding on the portfolios suitability.

ATEB view:

This is a huge skills and knowledge growth area for IFAs and will develop further in future years. Technology will play a major part, this is what the product provider’s want, and after all, it’s cheaper for them! For further information please contact ATEB or ‘Selsetia’ direct on 08456 410410 or visit their website www.selestia.co.uk

Action required by you:

None - for information only

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8. Fees and VAT - guidance

A growing number of IFAs now charge fees for advice and many will be making the switch from a commission to fees with offset, based practice soon. We thought it would be useful to give a quick summary of the main points relating to VAT. The VAT Act 1994 exempts certain services from VAT. The Schedule is available in full in the Customs & Excise Notice 701/39 entitled VAT liability law. The following is not comprehensive and we recommend that you seek professional guidance from a tax specialist if uncertain.

The service of arranging life, pensions and investment products and mortgage loans is exempt from VAT, an "exempt supply". This exemption applies regardless of whether remuneration for the service takes the form of fees or commission. Customs and Excise treat the supply of information and advice as "supplying a service". Where the information and advice is integral to an "exempt supply" and is not separately identifiable it is not subject to VAT.  However, if advice is given on a separate basis and with a specific charge, it is always a "taxable supply". In these circumstances, the advice is treated as a “taxable supply” up to the point when the client commences the contract.

Firms must register for VAT if the value of its “taxable supplies” in the past 12 months or less has exceeded the current VAT registration threshold (£55,000 as at March 2003). Commission received for arranging contracts should be excluded when calculating income for this purpose. Firms can elect to register voluntarily for VAT even though its taxable supplies do not meet the VAT threshold, but restrictions may apply on the reclaim of VAT paid out by a firm if it is also making exempt supplies.

Example scenarios: Assuming that the IFA firm is registered for VAT

• Where a financial report is produced for a client but no investment/insurance contracts are arranged, VAT is applied to the fee charged for the meeting and report.

• Assume an IFA agrees with a client that a fee of £500 will be charged for a financial planning report unless any of the recommendations are acted upon, in which case the commission generated will be offset against the fee. Then, investment/insurance contracts are subsequently arranged which generate sufficient commission to cancel out the original fee for the report. Because the fee for the report is a separately charged item, that part of the commission which covers the fee i.e. £500, attracts VAT, the balance of the commission is exempt.

Important: If a firm is not required to register for VAT or does not choose to register voluntarily because its taxable supplies fall below £55,000, VAT must not be charged on any supply of service.

ATEB view:

The application of VAT on fees is a very complex area.  VAT officers will judge each case on its individual circumstances. IFA firms may wish to seek guidance from Customs & Excise's National Advice Service on 0845 010 9000, their public notices or a VAT specialist or their website at www.hmce.gov.uk

Action required by you:

None - for information only

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9. Access to Financial Ombudsman Service – Non Regulated Contracts

This article applies to firms that arrange non-regulated contracts such as term assurance through their FSA authorised company.

Question: If a private client were to complain re some advice they received on a ‘non-regulated’ contract i.e. a term assurance whereby advice was given by an FSA authorised adviser and through an FSA authorised company, would the client have potential access to the FOS?

Answer: The client can complain and the Ombudsman will have jurisdiction to consider the complaint.  Jurisdiction is determined by status of firm being regulated and not the product being regulated.  In other words, the Financial Ombudsman considers actions of the regulated firm and its advice and not necessarily it being a regulated product.

ATEB view:

None - for information only

Action required by you:

None -for information only

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Important Note:

The ATEB Newsletter is intended to provide general guidance on areas of compliance and T&C; however it is not a replacement for the main Rules and Guidance contained within the FSA Handbook. We welcome all feedback. If you have any feedback or questions relating to any articles then please direct them to your local ATEB consultant or the newsletter editor Steve Bailey email steve@atebconsulting.co.uk Unless you have consulted specifically (as part of a regular visit) with ATEB on a particular issue then ATEB Consulting accept no liability for any actions taken based on the information contained solely within the newsletter.

Contact Us:

ATEB Consulting
The Old Post House
29 Nedderton Village
Northumberland
NE22 6AX

T: (01670) 822984
M: (07703) 576951
E: steve@atebconsulting.co.uk
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