If you would like to read this newsletter offline click here for a PDF download. Note: You will need Adobe Reader to view this document.

1. Anyone advising on Non Qualifying Term Assurance, Critical Illness, PHI etc
2. P.I. Insurance – reference to PI when corresponding with the client
3. General Insurance & Mortgage Arranging: Online Registration has arrived!
4. Jargon free communication is essential – Get the message?
5. Electronic Fact Finds - ‘frozen’ or ‘thawed’?
6. Equity Release Schemes (ERS)
7. Equity Release Schemes (ERS)
8. Mortgage Conduct of Business rules published in final form
9. Compliance record keeping in general – Five Top Tips
10. Renewal Commission

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:

Investment (IFA)	1	2	3	4	5	6	7	8	9	10
Directors/Partners
Compliance / A&O Function
Money Laundering Officer
Advisers & Trainees
T&C Supervisor
Pensions Transfer Specialist
Back Office
*Mortgage (inc. IFAs)	1	2	3	4	5	6	7	8	9	10
Director/Partner
Compliance / A&O Function
Sales Advisor
T&C Supervisor
Back Office
General Insurance	1	2	3	4	5	6	7	8	9	10
Director/Partner
Compliance / A&O Function
Sales Advisor
T&C Supervisor
Back Office

*Includes Mortgage arms of IFA and APF firms

1. Anyone advising on Non Qualifying Term Assurance, Critical Illness, PHI etc

Based on current information, if the answer to the above is ‘yes’ then your IFA firm (or authorised professional firm) will need to apply to vary its permission in early 2004, if you wish to continue advising in these (currently non regulated areas) from January 2005.

As you are probably aware, from 14 January 2005 the FSA will be given the power to regulate the sale and administration of general insurance and *pure protection contracts (Collectively referred to as non-investment insurance contracts)

* In broad terms, a pure protection contract is a long-term insurance contract that is not a contractually based investment and is therefore not currently subject to conduct of business regulation by the FSA. Pure protection contracts include contracts like critical illness, income protection and term assurance (often referred to as non regulated).

Selling and administering non-investment insurance contracts by both insurers and intermediaries, including providing advice are called insurance mediation activities in the proposed General Insurance Conduct of Business Rules (ICOB).

As rules stand presently, IFAs advising and arranging ‘Pure Protection’ contracts will need to apply for a variation in their permission to include insurance mediation activities.

This will involve application fees and an increase in periodic fees also.  Allegedly, the FSA had been unaware of the impact on IFA firms and are apparently looking into it.

ATEB view:

Easy to miss this one. We see this as a bureaucratic and additional expense in the process to ensure compliance.

Action required by you:

Keep in close contact with ATEB if you are unsure, however we will be reminding firms in a separate communication.

Return to Features List or Contact Us

2. P.I. Insurance – reference to PI when corresponding with the client

We have recently seen correspondence from a PI broker referring to how notifications of potential claims should be made and when you can disclose the existence of PI cover to your clients.

What was confusing was that the correspondence seemed to suggest that IFAs could not disclose details of the existence of PI cover to clients. Taken literally, the reference to PI cover in your Terms of Business, could invalidate a claim!

We have clarified the position with the broker however and reference to PI cover on the Terms of Business is allowed. What is not allowed is making any reference to PI when corresponding with the client in relation to a particular claim or complaint; for example, if you are sending a complaint acknowledgement letter (or similar), you must not refer to PI.

ATEB view:

This is obviously one broker’s interpretation, but firms should nevertheless be aware of the stricter procedures being introduced by brokers in general.

Action required by you:

Check if your PI insurers impose any such restrictions. Discuss with your ATEB consultant if in doubt, the general message remains the same -  “if in doubt, notify” i.e. don’t do anything without telling your broker.

Return to Features List or Contact Us

3. General Insurance & Mortgage Arranging: Online Registration has arrived!

FSA will be accepting completed applications from mid January 2004. Remember: Firms that are currently authorised by the FSA must not register now. These firms will be advised of the process soon.

• Step 1. Register (Now)
• Step 2. Complete application form (January)
• Step 3. Return form (Mid January)

The purpose of the registration process is to enable the FSA to provide access to the firms web application pack on the internet. The online application forms will be available in January. You should receive your logon activation code via email in late January 2004.

ATEB view:

If you are not 100% confident that you can find the time to complete the application, understand and digest the new rules & jargon, become familiar with your new responsibilities, implement all the required procedures, train your staff and of course ……………run your business! Then feel free to call ATEB, as always we’re here to help.

Action required by you:

The form does not allow you a ‘save’ option. ATEB suggest that you print a blank form first so that you know what is required before actual on line completion. Registration is available at: https://mgi.fsa.gov.uk/fsareg/RegistrationForm.asp A paper version of the form is available as a sample we suggest firms print this and familiarise themselves in advance. Sample form at: http://www.fsa.gov.uk/mgi/sampleform.pdf

Return to Features List or Contact Us

4. Jargon free communication is essential – Get the message?

You are constantly told by the FSA and us, that you must keep your language relatively straightforward and jargon free in correspondence with clients. You might be interested to read the following, which is an extract from a market outlook letter sent by a very well known Unit Trust house to it’s clients.

“As corporate restructuring and industrial capacity downsizing continues to be relentlessly pursued in the world’s major economies, the current business cycle moves towards an interesting inflection point. For the moment, sufficient excess capacity and corporate indebtedness still exist to maintain sub-par growth rates and a disinflationary bias. Significantly, accommodative monetary and fiscal policy throughout the developed world is testimony to this. However, in the absence of outright deflation/depression (which we ascribe a low probability of occurring), it is reasonable to assume that growth will begin to revert upwards towards its potential, perhaps by 2004. In this scenario, the current output gap will gradually close and global economic activity should move back towards trend levels.

More encouragingly, beneath the macro-economic mist, the micro-economy is tangibly improving. Corporate margins are being restored, admittedly through cost control rather than top line growth, but this augers well for the future profitability even if incremental demand remains muted”.

Obviously, my granny will know exactly what to do with her small ISA having read this! Do you think they’re trying to hide something ???

ATEB view:

The veritable abundance of techno inspired babble, with bias towards a post-modernist and self-inherent protectionist style, can only lead one to believe that necessity, while being the self-professed mother of invention, has clouded the author’s sensibility and produced a nebulous commentary, bordering on the nefarious.

Action required by you:

None, for information only

Return to Features List or Contact Us

5. Electronic Fact Finds - ‘frozen’ or ‘thawed’?

There is no doubt that once you have the majority of client information stored on your electronic system maintaining the ‘know your customer’ compliance requirements become a great deal easier. However, did you know that if you continually update these fact finds as you visit clients you could be losing your ‘know your customer’ information. ATEB have already witnessed this on a number of audits this year.

Think about this scenario, customer complains over some advice given 4 years ago. As part of your investigation you are required to examine the recorded fact find prior to the sale. You look on your back office system and you have one completely up to date fact find.

Here is the catch; in the last 4 years, you have seen this client three times.  You now have a very real and serious problem; you will find it very difficult without altering and creating new records to find the information that you require to complete your investigation. Now apart from breaching the FSA rules and guidance (COB 5.2.5) you have left yourself open to attack from the complainant.

ATEB view:

Some of these back office systems are powerful monsters, its important that you understand their compliance functionality. The back office providers will not always prompt you, mainly because they don’t always have the full knowledge of the underlying rules. Always remember that the FSA will not chase the back office provider however they will pursue you. And don’t forget the same principles of compliance apply to any research tool or projection system that the firm uses.

Action required by you:

The solution is very simple; most back office systems incorporate a ‘Freeze facility’ we suggest that you implement this immediately for all new business. The alternative is to print the fact find (Prior to the sale) and store this on the client file.

Return to Features List or Contact Us

6. Data Protection – Do you have consent?

Although strictly not a compliance issue, the way in which IFAs collect and process client information is an extremely sensitive and important area. It is essential that firms set out clearly, for example, in their customer agreements what the data will be used for. If a firm uses data for a purpose that the individual has not consented to then this could be a contravention to the Act. This could involve ‘direct marketing’ which has a surprisingly wide-ranging meaning under the Act.  The problem is potentially compounded if you do not have positive consent. One way that is likely to show positive consent is through a signed declaration.

Practically, you also may wish to consider how many declarations you have in the various documents; the proposal form will normally contain a declaration relating to the provider, however we have come across old style declarations in some fact finds that often contradict those in the client agreement.

ATEB view:

Is important that firms are aware of why they are doing something as well as what they need to do.

Action required by you:

If in doubt please speak to your ATEB consultant.

Return to Features List or Contact Us

7. Equity Release Schemes (ERS)

In July, our newsletter included an article about the MCCB’s new leaflet ‘You & Your Equity Release’. The sale of these products is becoming more common and is often promoted as the only serious answer to the emerging pensions crisis.

Did you know that:

• many ERS are unregulated (Home Reversionary Schemes)
• there is currently no professional qualification requirement for advising on Home Reversionary Schemes
• best practice is not commonly understood.

Bearing in mind the problems associated with the previous manifestation of this product, albeit that this incarnation is broadly better designed; it is vital that all firms active in this area ensure that advisers are trained and tested and that full research is conducted into the various policies available.

Although the concept is relatively straightforward, any complexities within the schemes must be communicated in a straightforward manner to customers, in writing. For example, with reversion schemes, exactly how will the customer and provider benefit from any increase in the property value, or conversely, what if the value drops?

Fact-finding is, as always, crucial. You should ascertain future priorities, for example, are the customers likely to move house – what effect does this have, is it different if trading up or down? The client’s future priorities should be ‘played back’ to them in the suitability letter, together with how that eventuality affects the ERS. As always, potential pitfalls must be clearly documented as ‘Risk Warnings’. For example, for lifetime mortgage ERS; did you know that the interest rate could be 2 – 3% higher than standard mortgages? What happens if rates increase and the capital builds up beyond the value of the property?

ATEB view:

The fact that many ERS are unregulated is irrelevant – adopt a quality business process and ensure that your suitability letter is comprehensive. Be careful! Ensure you fully understand the product and the client’s requirements and expectations.

Action required by you:

If you would like you ATEB consultant to ‘vet’ any such business, which you have, or intend to write, please get in touch. ATEB clients should make use of the very detailed templates that are available in section 11 of the CPM.

Return to Features List or Contact Us

8. Mortgage Conduct of Business rules published in final form

The Mortgage Conduct of Business Rules have been published recently and are located at: http://www.fsa.gov.uk/handbook/legal_instruments/2003/2003_71.pdf

ATEB view:

Excellent read for the purists, make sure you set aside enough time to absorb the detail - we suggest a month!!  Alternatively let ATEB take the strain.

Action required by you:

Feel free to call us, if you would like support on these changes and implementation of new systems and controls.

Return to Features List or Contact Us

9. Compliance record keeping in general – Five Top Tips

Always record detailed ‘Know your customer’ information and obtain client signature where possible. In addition the client file should include any additional notes, details of telephone conversations etc. “Know your customer” is not just about a Fact Find.

As part of our audits, we still find client files that:

• Contain no fact find 
• Contain fact finds with space for client signature but client has not signed.
• Contain fact finds that are partially completed and contain blanks.

Retain a full and complete copy of the suitability letter on file with the adviser signature.

As part of our audits, we still find Suitability letters:

• Without formatting / Not on headed paper
• In draft format
• With no signatures or names of adviser

Ensure Terms of Business (TOB) correlates with Suitability Letter (SL) and Fact Find (FF)

As part of our audits, we still find:

• TOB includes one client signature and FF or SL addresses two clients
• Objectives in TOB differ to those in the SL
• TOB explains that objectives will be in the SL but then the SL omits the objectives
• TOB of business states Firm will not review but the SL states that Firm will.

Research should be independent and tailored.

You don’t need expensive software to document research in fact I guarantee you will never be able to ask enough questions during the fact find to satisfy the inputs required in most of the research software available.  On the other hand, you should not simply rely on a single sales aid from the provider that you finally recommend. Provider sales aids are financial promotions and should not be used as objective independent research.

Use recorded delivery or ask client to sign confirming receipt

‘Selective Memory Syndrome’ – This is strange medical affliction that generally tends to affect two categories of client (or ex client)

• Those that never want to admit that they are wrong and / or
• Those that want everything but are unwilling to give anything in return.

The onset of this rather peculiar (but becoming more widespread) illness usually commences soon after the patient has read the ‘Mail on Sunday’. You may wish to use recorded delivery or ask the client to sign to say they have received documents if you feel there could be future issues or where something is classed by the firm as being higher risk.

ATEB view:

I wonder how many firms reading this article are breaching basic compliance issues; remember these issues will only become a problem in years to come.

Action required by you:

If in doubt please speak to your ATEB consultant.

Return to Features List or Contact Us

10. Renewal Commission

We often get asked questions on the topic of renewal commissions. If firms are unsure, we suggest taking legal guidance, as strictly this is not a compliance issue. Here are our some observations:

• The area of commission renewals is grey.
• An individual within the FSA did explain in a telephone conversation with ATEB that although they do not like renewals being received by a firm that is not FSA authorised, they accept that it is not their remit. The payment of renewal commission is a commercial matter between the IFA firm and the provider.
• Most providers, in their agreement, pay the renewal for ‘servicing’. Although, interestingly, most IFAs state in their Terms of Business that they will not service clients unless a request is made.
• Servicing is required to be regulated, it follows therefore that servicing requires Part IV permission, that is the firm must be FSA authorised and hold that particular “Permission”.
• Our experience generally is that where a firm loses their FSA Authorisation (Part IV Permission) product providers stop paying.
• Some providers automatically stop paying renewals if the IFA has not completed new business for say a couple of years.
• We are led to believe that the FSA advise providers each month of firms who are FSA Authorised and regulated.

ATEB view:

Those firms looking to build up a future renewal income within their business may wish to consider double checking the small print in their provider agreements to ensure that they are aware of what could happen if circumstances change.

Action required by you:

None, for information only

Return to Features List or Contact Us

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
W: www.atebconsulting.co.uk