Investment Firms
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1.
Treating Customers Fairly (TCF) update / FSA workshops
2.
Principles-based regulation – Initial implementation due fourth quarter of 2007
3.
Update on retail distribution review
4.
Financial Promotions Guidance
5.
Consumer Credit Licence (CCL)
6.
Endowment complaints – capping where the policy remains linked to a mortgage
7.
Regulatory Capital Requirements – FSA produce factsheet
8.
SIPPs – The right paperwork but the wrong profile?
9.
FSA fines IFA for unauthorised portfolio management
10.
Failings in connection with pension transfers – IFAs barred
11.
Risk Profiling
12.
Pensions Regulator sets out approach to DC regulation
13.
Supervisor Skills Workshop
14.
ATEB Mortgage Workshop – A success!
15.
FSA reviewing Self Certification
16.
FSA remove age 70 rule with effect from 6th June 2007
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?
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1.
Treating Customers Fairly (TCF) update / FSA workshops
The FSA conducted telephone survey with 659 firms during first quarter of 2007.
Many firms did not meet the March 2007 deadline (to be implementing TCF in a substantial part of the firm’s business)
The percentage of firms not meeting the deadline was as follows:
- 78% of small mortgage firms
- 55% of small GI firms and
- 48% of IFAs
The FSA puts the above down to lack of commitment of senior management
So what action are FSA taking?
They will visit those that ‘failed to engage with TCF’ i.e. those with substantial failings or showed no evidence of any attempts towards TCF. The FSA will also visit 10% of firms that have done some work but had failed to meet the deadline or are making slow progress
The FSA will conclude the visits by the end of June 2007.
They are now setting further deadlines. By the end of December 2008, all firms must be able to demonstrate that they are consistently treating customers fairly.
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2.
Principles-based regulation – Initial implementation due fourth quarter of 2007
Past experience suggests to us that prescriptive standards have been unable to prevent misconduct. The ever-expanding rule books of predecessor bodies and the FSA
Handbook have not stopped further mis-selling, market misconduct or other poor practice. Instead the FSA believe that detailed rules have become an increasing burden on their own and the industry’s resources.
The FSA believe that any set of prescriptive rules is unable to address changing market circumstances and practices at all times, and it inevitably delays, and in some instances prevents, innovation. In a quickly changing marketplace, principles are far more durable.
This does not mean the FSA will be a purely principles-based regulator. In certain areas they will continue to rely on detailed rules and prescriptive processes. For example, when implementing EU legislation they are likely to need to include more detailed rules in their Handbook. So, in reality, therefore, there will always be a mixture of detailed rules and principles in the regime.
| Ateb view: |
| There is no doubt that an increasing volume of detailed, prescriptive and highly complex rules will continue to divert attention towards adhering to the letter, rather than the purpose of the regulatory standards. Firms need to be careful though because the FSA are indirectly giving firms a longer piece of rope. |
| Action required by you: |
| You can read more at: http://www.fsa.gov.uk/pages/Doing/small_firms/general/pbr/index.shtml |
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3.
Update on retail distribution review
The FSA will set out the key issues for discussion on its major review of the retail distribution market at a conference on 27 June 2007.
The review covers the activities of the full range of market participants involved in the retail distribution of investment products. Whilst the focus is on investment products, there may be some read-across to other product areas such as general insurance or mortgages, reflecting the emerging industry view that the market should be service-oriented rather than product-oriented in its approach to consumers.
Overall, there seems to be some preference for a move away from the focus on products towards the range of services that reflect consumer needs.
The outcomes the FSA are looking for might include:
- Services that are clearly defined and can be explained to consumers
- Remuneration structures that reflect both the services provided and the responsibility of those providing the services
- Standards of professionalism that are proportionate to the service offered and enhance the reputation of the industry
- Products that are more transparent and, where appropriate, simpler and more accessible, reflecting consumer needs
- Regulation that provides incentives for firms to treat their customers fairly and is proportionate to the risks presented
- Capital, liability management and other prudential requirements that result in sustainable businesses
| Ateb view: |
| As ever with this type of major change I suspect that there is a hidden agenda. No doubt time will tell. |
| Action required by you: |
| None - for information only. However, interested parties should be alert to an FSA Discussion Paper in to be issued June 2007. |
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4.
Financial Promotions Guidance
A recent FSA bulletin aims to help firms understand FSA requirements to issue ‘clear, fair and not misleading financial promotions’, and help raise standards further.
The bulletin outlines some of their findings and failings relating to the promotion of:
- Direct mail
E.g. the covering letter should prominently display risk and drawbacks.
- Sub prime mortgages
E.g. the range of fees advertised should be the same as the fees the client eventually pays.
- General insurance
E.g. claims should not state that most customers would be eligible for a price saving when the saving is based on an unrepresentative sample of the target audience.
- Venture Capital Trusts (VCTs)
E.g. when describing the risks, firms should bear the target customer in mind and adapt the language so it is clear and meaningful from their point of view.
- Self-Invested Personal Pension Schemes (SIPPs)
E.g. Promotions should clearly state the disadvantages of a SIPP.
- Home Reversion Plans
E.g. Give no less prominence to the possible disadvantages than to the benefits associated with a feature.
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5.
Consumer Credit Licence (CCL)
We continue to receive questions regarding whether a consumer credit licence is required.
The requirement to have a CCL depends on the business you do. If you arrange second charge mortgages and other loans not within the FSA mortgage regime you are likely to continue needing a Consumer Credit Licence.
A licence covering category C is needed by those who introduce their customers or clients to sources of credit in order to sell their own goods or services.
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6.
Endowment complaints – capping where the policy remains linked to a mortgage
Sometimes a business believes the calculation of loss should be restricted (or ‘capped’) to a date in the past when, in its view, the consumer was aware of a problem with their policy, so could have done something about it.
Occasionally, in cases where the policy remains linked to the mortgage, the FOS will agree that the business should calculate the consumer’s recoverable losses to an earlier date (often six months after the consumer received a ‘red’ letter, by which time they ought reasonably to have realised they had cause for complaint).
This might happen in cases where:
- the consumer is particularly financially sophisticated (for example, because they work in a relevant part of the industry) or
- the consumer sought and received professional advice about their options and action they might take to prevent further losses from arising, but then failed to take reasonable steps.
However, a word of caution. The FOS does not always accept capping arguments simply because the consumer has discussed matters with an adviser. There needs to be evidence showing that the firm has discussed the steps a client might take to prevent their position from getting any worse.
A case study in the FOS newsletter, edition 61, shows that a firm had not discussed surrendering their client’s policy and converting their mortgage to a repayment basis – a step which (in the opinion of FOS) would have prevented the losses that arose later. The firm referred to in the case study did just about everything else possible including pointing out the problem clearly. However this was not good enough for the FOS.
| Ateb view: |
| Applying this thought process more universally, it appears that simply pointing out the downsides and giving the “wait and see” option when reviewing clients’ policies, whether it is an endowment, with profit bond or other forms of saving, may not be strong enough. You will need to be clear about all options available and is likely to include a definite surrender option to prevent a loss from getting any worse. |
| Action required by you: |
The FOS newsletter that has the article on capping can be found at:
http://www.financial-ombudsman.org/publications/ombudsman-news/61/61.pdf |
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7.
Regulatory Capital Requirements – FSA produce factsheet
FSA have produced a factsheet for investment firms including those that additionally advise on mortgage contracts and general insurance products.
It explains:
- what minimum amount of funds you must have to meet the FSA basic financial resources requirements;
- the implications of not holding sufficient funds;
- action if you find that you do not have enough funds to meet the FSA’s requirements.
- about reporting your financial information to the FSA;
- how accounting standards and FSA financial requirements interact;
| Ateb view: |
| If you do not have sufficient funds to meet the requirements you risk losing your permission to continue doing regulated business. It’s essential that you maintain the correct funds at all time and not just when you report every six months. |
| Action required by you: |
Having less than the required funds is a breach of FSA rules and so the FSA will expect you to take urgent action to protect your customers.
Therefore, if you find that you do not have enough funds to meet the regulatory requirements it is essential that you tell the FSA’s firm contact centre immediately, including information about how you plan to correct the shortfall. The Factsheet is available at:
http://www.fsa.gov.uk/pages/Doing/small_firms/advisers/pdf/funds_factsheet.pdf |
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8.
SIPPs – The right paperwork but the wrong profile?
The FSA has said: "There have also been suggestions that some consumers have been advised to join SIPPs who do not need the flexibility and range of features that SIPPs can offer and who would be better suited to say a stakeholder pension or personal pension with sufficient features but which come at a cheaper cost". The FSA has gone on to say that it is already monitoring closely the provision of advice on SIPPs.
On our visits to firms we occasionally see the only reason given for recommending a SIPP are to pull a number of existing PP contracts together and have a wide choice of funds. Basically these reasons in isolation are quite weak and open to be challenged.
| Ateb view: |
| Nothing new here – we have been banging this drum for some time. Your paperwork might ‘fit’ on initial inspection, but if you advise the wrong profile of client then there could be future repercussions. |
| Action required by you: |
We recommend that the explanation should include specific comment and comparison of the relative costs and other disadvantages against stakeholder.
More information can be found in the FSA's March Newsletter:
http://www.fsa.gov.uk/pubs/newsletters/fa_newsletter7.pdf |
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9.
FSA fines IFA for unauthorised portfolio management
An IFA firm regularly switched a number of clients between funds although the firm did not have permission to operate in this way. The firm would often send clients an email before 6.30am proposing the switching of funds and requiring a response by 8.00 am. Switches would then take place without any further instruction from the client.
They also failed to record sufficient client information to demonstrate the suitability of its advice; failed to ensure transactions were appropriate for its customers' attitude to risk; and failed to communicate with its clients in a clear, fair and not misleading manner.
The FSA made an interesting quote: “The switching of clients between funds in a way that was outside of their declared attitude to risk could have resulted in them suffering large and unexpected financial losses”
| Ateb view: |
| There are many (non discretionary) firms who operate a similar switching facility, but have this agreed in writing first which is of course vital. However, how many actually document the changes by updating the fact find / files notes and formally check that the changes are STILL aligned to the client s attitude to risk? |
| Action required by you: |
If you are switching clients on a regular basis, ensure that your systems are adequate.
You can read more at: http://www.fsa.gov.uk/pubs/final/charterhouse_11may07.pdf |
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10.
Failings in connection with pension transfers – IFAs barred
The case relates to advice provided by an IFA regarding the transfer of employees from membership of the final salary pensions of one manufacturing company to the group personal pensions scheme of another following a company takeover.
The firm’s principal was personally involved in the failures which included putting in place a flawed advisory process which led to the transfer of occupational pension benefits when this was potentially unsuitable for clients and exposed them to the risk of significant loss and detriment. Part of this flawed process involved moving clients with a high critical yield into a cash fund.
For one particular client the critical yield was 21% with only 2 years to retirement.
The firm has been instructed to undertake a past business review which will identify any instances of unsuitable advice and assess and determine appropriate compensation for loss arising from such advice.
| Ateb view: |
| It’s frightening to think that the IFA was paid a king’s ransom for simply giving the client a “you choose option” (great work if you can get it!). Clearly, the FSA want firms to make the statement “I recommend …” and this particular IFA backed away from his professional duty and, dare I say it, “he didn’t treat his customers fairly”. |
| Action required by you: |
If you are an IFA advising on pension transfers you MUST read the final notice at:
http://www.fsa.gov.uk/pubs/final/ivan-richards.pdf Avoid the legal waffle and go to page 9 (section 4) it makes interesting and scary reading!! |
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11.
Risk Profiling
As you are all aware, there are many automated systems which are available in the market which help create a risk profile for clients. They are mostly made available by Providers and, on the face of it, can be very useful to try to obtain an objective view.
However, if you use one or more of these systems, have you ever considered:
- What parameters are used to arrive at the profile?
- Who has set the parameters?
- What judgement is used?
- Who is responsible for the profile produced?
Well, we can’t answer the first two issues and Providers can’t give us an answer either.
However, we can answer the second two issues:
No judgement is used. Machines can manipulate information, but the results are only as good as the information fed in. The machine may not be able for example, to cope with contradictory information and, therefore, unless the parameters are correctly set, the results could be misleading. However, as we’ve already said, we don’t know the parameters used!
So our advice to you is “Take Care”.
With that in mind, ATEB is shortly launching an updated set of fact finding materials, including a Risk Profiler, which are designed to help you (rather than a machine) establish a risk profile.
| Ateb view: |
| YOU are responsible for the risk profile produced. If it’s later found to be incorrect you could blame the Provider, but remember YOU are ultimately responsible. |
| Action required by you: |
| These documents will be available for download from the ATEB website early next week under the “toolkit” section. However, if you require an urgent copy please email us. |
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12.
Pensions Regulator sets out approach to DC regulation
Industry-wide views on the regulation of defined contribution (DC) schemes have been published by the Pensions Regulator following its recent consultation, alongside a discussion paper on pension scheme governance.
Identifying key issues for DC schemes - including administration, investment choices, charges, decisions on retirement choices and member awareness - the consultation document sets out proposals on how DC schemes will be regulated. The consultation responses will inform guidance, setting out how the Pensions Regulator will regulate DC schemes, which will be published in due course.
The regulator has also published a discussion paper on pension scheme governance and invites comment from the pensions community. The paper highlights the pivotal role of education and the importance of good governance in running all schemes. Key themes relating to defined benefit schemes are managing conflict, the employer covenant and relations with advisers. Issues around administration, investment choices and winding-up relate to all schemes and these issues will also be highlighted in the DC guidance.
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13.
Supervisor Skills Workshop
Content:
- Overview of general T&C requirements on regulated firms
- Setting customer facing sales process standards
- Consistent and accurate assessment skills
- Theory of coaching and training
- Training Needs Analysis completion
- Constructing SMARTA development plans
- Structuring one to ones
- Monitoring performance
Who should attend?
- Qualified supervisors wishing to top up existing supervisory knowledge
- Newly appointed supervisors
- Supervisors who had previously been classified as ‘self supervising’ (under PIA)
Timings:
9.30am until 4.00 pm
Location:
Newcastle upon Tyne
Cost: £175 plus vat per person
| Ateb view: |
| Although we often quote the regulatory requirements, don’t forget that quality supervisor training will certainly have a positive impact on your business. |
| Action required by you: |
Before we announce dates can you first respond identifying your interest in attendance AND dates in July and August that will not be possible (i.e. due to holidays), this way we can maximise numbers. Please aim to respond within 7 days of this newsletter if possible and, following your responses, we will confirm definite dates.
Please let us know by email or telephone using the contact details in this newsletter. |
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14.
ATEB Mortgage Workshop – A success!
The inaugural ATEB mortgage workshop took place Wednesday 22nd May at St James Park and was very well received by the 32 attendees. Many thanks to Active Lending Solutions (the UK’s fastest growing mortgage club) who presented their excellent proposition and helped organise the day.
Subject covered were;
- TCF
- Self Certification
- Sub Prime
- Affordability
- Debt Consolidation
- Interest Only
- First time buyers
- Retirement ages
- Lifetime mortgages
We had a presentation from Accord Mortgages and a new exclusive self certification style mortgage from Scottish Widows and thanks also to the Halifax for their mortgage presentation together with an insight into their competitive building and contents product.
| Ateb view: |
| Some would argue that it was the only success at St James Park this season!! |
| Action required by you: |
| In order to continue running these workshops we need to guarantee a minimum attendance. For our part, we will make every effort to ensure we only present on topics that are relevant and useful in your role. All that we ask is that firms make the effort to commit to future workshops. We intend to run 2 more by the end of the year and move to quarterly for 2008. We will also write to you shortly to gauge subjects that you would like in future workshops. |
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15.
FSA reviewing Self Certification
The FSA are currently following up the self certification project work completed in 2005 during which they;
- Visited 39 small mortgage brokers
- Examined 249 client files in detail
- Conducted 40 mystery shopping exercises
The outcome showed that:
- 36% of firms recorded no reason or justification for self certification
- 42% of files were for employed customers and 83% of these had no reason or were unclear
- Affordability was not assessed adequately in 47% of the files
FSA are now conducting telephone calls to firms.
The results of this project will be announced in September 2007.
| Ateb view: |
| Very simple – DO NOT LISTEN to the LENDERS (they have a very different agenda) the buck stops with YOU, the ADVISER. Ensure that you fully document your rationale and have evidence to back up your advice. |
| Action required by you: |
| Ensure that you profile your clients and only advise self certification for the right situations. Always record the self certification cases that you turned away or where you declined to act. This will help demonstrate a compliant approach to this sector of the market. |
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16.
FSA remove age 70 rule with effect from 6th June 2007
Changes to the definition of a pure protection policy will allow certain business that is currently regulated by the investment-based Conduct of Business sourcebook (COB) to move to the ICOB regime. The effect of the changes will be for all term assurance sales to be regulated under the ICOB regime. In addition, some whole of life policies, provided they do not have a surrender value, will move across to the ICOB regime.
All unit-linked and with profits whole of life policies will continue to be regulated under COB. Any whole of life policy which has the ability to acquire a surrender value at some period in time, even if this is several years into the life of a policy, would not meet the definition of a pure protection contract and so will not be affected by this rule change.
The FSA do not view the products affected by this proposal as highly complex and feel ICOB advisers are adequately equipped to deal with the sale of these policies.
The FSA are of the view that the products affected by these proposals are not widely used for inheritance tax planning purposes. They feel that general training and competency requirements in ICOB will prevent ICOB advisers from straying into the realm of inheritance tax planning advice without possessing the necessary expertise to do so.
| Ateb view: |
| A word of caution: ICOB advisers generally do not have the necessary expertise to advise on inheritance tax planning matters, so be careful. This is a complicated area of tax and firms would be unwise to take a scattergun approach. A strategy should be put in place which could involve nominated experts or a simple process to refer to an IFA. |
| Action required by you: |
Supervisors should continue to remain vigilant that insurance advisers cannot access COB products without the correct training and authorisation.
You can read more at: http://www.fsa.gov.uk/pubs/handbook/hb_notice65.pdf |
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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
W: www.atebconsulting.co.uk
