Investment Firms
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1.
New measures to help small firms from FSA
2.
Training & Competence
3.
Complaints
4.
Overseas Clients & MiFID
5.
Retail Distribution Review – RDR
6.
New Money Laundering Regulations 2007
7.
Self Invested Personal Pension (SIPP)s
8.
Multi-manager
9.
3 questions for senior management on With-Profits
10.
IFA’s Permissions withdrawn
11.
Reminder: holding client money & excess commissions
12.
Recent FSA road shows
13.
Quality of Advice – Mortgages
14.
Mortgage thematic ‘affordability’ visit – feedback
15.
Payment Protection Insurance - Update
16.
Protection and general insurance
17.
General Insurance - Advised or Non-Advised?
Ladies & Gentlemen
Please find enclosed the latest compliance and industry news.
As usual, sit back and enjoy!
Kind Regards
ateb consultants
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1.
New measures to help small firms from FSA
The Financial Services Authority (FSA) has announced it is introducing new measures to increase its contact with small firms. The aim is to help firms make faster progress in meeting the FSA's Treating Customers Fairly (TCF) initiative and to identify, more quickly, those firms most in need of regulatory attention.
Building on its current risk-based approach, the FSA is introducing an ongoing programme of structured visits and/or telephone assessments to test the quality of management and progress towards embedding TCF. The results will help update its risk profile of individual firms so that it can better target resources at the firms that pose the biggest risk to its objectives. The FSA expects to carry out full on-site visits to approximately a quarter of firms in order to verify the assessments and follow-up identified issues.
| Ateb view: |
| We see this as a benefit to those firms who are trying to do the right thing and treat their customers fairly. |
| Action required by you: |
Ensure that your TCF plan is up to date and ongoing improvements are documented.
The FSA has already set a deadline of end-December 2008, by which time it expects all firms to be able to demonstrate that they are treating their customers fairly. |
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2.
Training & Competence
The FSA admit that the T&C Sourcebook has become increasingly complex as its scope has expanded and some of the more detailed provisions are legacies from the rulebooks of previous regulatory bodies. Subsequently, the FSA have removed some of the more prescriptive requirements and replaced them with a more user-friendly format.
A key change for IFAs and Mortgage Brokers is the removal of the ‘2 year time limit’ for obtaining an exam. From November 2007 it will be for the firm to set the time limit for qualifying.
| Ateb view: |
| Less guidance means greater chance of getting it wrong – sorry to be so negative! |
| Action required by you: |
| None – We will make updates to the web based ATEB manual. Although we don’t envisage making many changes because we would rather not fix something that isn’t broken. |
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3.
Complaints
There are changes to the FSA complaint handling rules that take effect on 1st November; the key areas are shown below:
- The 5 day acknowledgement letter deadline has been removed and replaced with a requirement to ‘deal promptly’ with a complaint.
- The 4 week holding letter deadline is being removed and replaced with a requirement to ‘keep the complainant reasonably informed’.
- Firms don’t need to display the FOS sticker but must inform the customer earlier in the process about FOS (via a firms terms of business / IDD) and when acknowledging a complaint.
- The FSA want all complaints to be resolved within 8 weeks as standard, except where this is not practical for reasons beyond the firm’s control.
Records (relating to MiFID business) should be kept for a minimum period of 5 years rather than the 3 years that was previously required.
| Ateb view: |
| Welcome the changes but would still recommend that existing timescales are maintained. |
| Action required by you: |
We will make updates to the web based ATEB manual.
Please note that in our experience, numerous complaints extend beyond the 8 week deadline – firms will now need to act promptly on receipt of a complaint to gather investigation material. |
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4.
Overseas Clients & MiFID
The Financial Services Authority (FSA) has published a factsheet providing help and information for financial advisers who wish to continue to advise their clients who live abroad after 1 November 2007. It asks IFAs to consider whether they are providing cross border services (in simple terms giving advice to someone whilst they are living in Europe or wider afield). However, an important consideration (that is not made entirely clear on the fact sheet) is whether the firm is "soliciting" business or merely continuing to provide an existing advisory service to existing clients who may already be in another EEA state or who may have moved since the business commenced.
In such cases, the FSA does not expect the firm to obtain a passport (and hence, become subject to MiFID). If, however, the firm wishes to solicit new clients in other EEA states then a passport is likely to be required. Another example where care should be exercised is where new products and services are marketed to existing clients - this is likely to require a passport.
| Ateb view: |
None – for information only. |
| Action required by you: |
If you have clients overseas you should read the fact sheet and seek further advice if necessary - contact the Perimeter Guidance team at the FSA or ATEB.
The fact sheet is available at:
http://www.fsa.gov.uk/pubs/forms/passporting_factsheet.pdf |
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5.
Retail Distribution Review – RDR
A few ATEB clients appear to have been amongst the selected few to attend the recent FSA dinner to discuss the RDR.
There are of course serious concerns amongst the IFA community about some of the proposed changes. Certainly at the recent road show, the FSA attempted to step back from responsibility for the details of the proposals, blaming the other industry and consumer groups who had contributed to the project.
The FSA claimed it is merely standing as a means of putting the ideas out there for debate.
| Ateb view: |
| The proposals obviously give cause for concern for the future of the profession and the quality of service to clients. The only way to change the direction of the paper is to respond en masse. |
| Action required by you: |
Firms must respond to the proposals, even if they have never responded to an FSA paper before – you do not need to respond to every question.
To respond click here:
http://www.fsa.gov.uk/pages/library/policy/dp/2007/dp07_01_response.shtml |
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6.
New Money Laundering Regulations 2007
The new regulations are driven by the Third EU Money Laundering Directive and come into force on the 15th December. It will require the FSA, and other bodies (for example the office of fair trading), to supervise some new types of business. It will also introduce new requirements that were not included in the previous regulations.
| Ateb view: |
| None - for information only. |
| Action required by you: |
| The JMLSG guidance is being redrafted to reflect the requirements of the Money Laundering Regulations. ATEB will update its web based procedures manual in time for the changes. |
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7.
Self Invested Personal Pension (SIPP)s
The FSA have recently undertaken a small thematic project to review the retirement planning advice market to assess the impact of pensions tax simplification.
The work indicated some potential concerns with SIPP advice.
A SIPP that is recommended for self-selection of investment assets will generally stand the FSA suitability test however those contracts recommended purely to access to a broader range of packaged investment funds may struggle in this respect.
Under these circumstances, a stakeholder pension or personal pension may equally satisfy a customer’s needs, potentially at a lower cost. This is particularly important where the customer is charged for flexibility that he or she does not need or will not use.
Although rumoured in the press to have gone, the FSA never removed the ‘RU64’ requirement whereby a firm must document the reasons why a personal pension plan is at least as suitable as a stakeholder pension scheme.
| Ateb view: |
| This is not a new subject. We’ve discussed it in recent newsletters and fear it could bite firms in the future. Expect more from the FSA on SIPPs in 2008. |
| Action required by you: |
| SIPP providers operate a variety of charging structures, and firms need to ensure that they carry out proper cost comparisons with the alternative personal pension and stakeholder arrangements. |
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8.
Multi-manager
The FSA have recently visited a selection of firms to look into how and why small firms have been recommending multi-manager funds to their clients. Although the multi-manager concept has been around for many years, the work was prompted by a growth in the number of sales in this area.
- The FSA sought views on the importance of asset allocation, on their ability to recommend suitable investment funds to their clients, and on outsourcing.
- They asked about firms’ understanding of the multi-manager fund charges, including such hidden charges as stamp duty and broker commissions.
- They looked into the disclosure of multi-manager pros and cons to see if clients had been provided with sufficient information to reach an informed decision on the firm’s recommendation.
The FSA plan to provide an update in November’s newsletter for financial advisers.
| Ateb view: |
| Watch this space |
| Action required by you: |
| If you advise in this area you should consider the above in relation to your own sales process. |
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9.
3 questions for senior management on With-Profits
The FSA are concerned that in the absence of advice and clear communications, consumers may make poor decisions (or no decisions at all) about their with-profits and other investments.
A lack of advice and poor information means that policyholders may be staying without being made aware of the implications of a change in the underlying investment mix and how it might impact on their financial planning. Some individuals will be switching out of with-profits when they should be staying (e.g. not taking advantage of MVR free-dates and GARs).
Senior managers in IFA firms should have a strategy for dealing with with-profits and may wish to ask 3 key questions:
- Are you satisfied that where your customers hold with-profits policies, you are treating them fairly in terms of the ongoing service or advice that is being provided?
- Are the advisers within your firm in a position to advise customers about the ongoing suitability of their with-profits products? (They should take into account how that product may have changed since it was originally purchased).
- Are you challenging insurers on the quality and availability of information on your clients’ with-profits policies?
| Ateb view: |
| Pro-actively managing your with-profits book is simply good risk management and TCF. |
| Action required by you: |
If you have clients invested in with-profits you must read the following:
http://www.fsa.gov.uk/pubs/other/isb_quality.pdf
All with-profits policy holders should be identified and a plan of action undertaken to ensure that investments remain suitable. |
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10.
IFA’s Permissions withdrawn
Another IFA has had its Part IV Permission withdrawn. Basically, the firm had no systems in place to monitor and control the activities of its staff.
The firm had not taken any steps to establish the reasons for business that had come off the books. The firm had also failed to notify the FSA of key information about the business which included information concerning one of the firm’s advisers who had been the subject of complaints at a previous employer. A significant proportion of these complaints had been upheld.
| Ateb view: |
| Being able to access quality KPI information concerning advisers and their business is of paramount importance, however this is only half of the task, firms need to take swift and positive action when an adviser’s performance is not up to the required standard. |
| Action required by you: |
| Check your KPI production and ensure that you have regular ‘one to one’ meetings in place. |
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11.
Reminder: holding client money & excess commissions
With MiFID approaching fast we thought it would be worthwhile just reminding firms about the treatment of excess commissions.
The FSA proposed in CP06/14 that firms receiving commission on behalf of clients in the course of MiFID activities would be able to hold excess commission outside the client money regime in the following circumstances:
a. For as long as it was reasonably necessary to determine the ownership of the money.
b. Where the firm has agreed, in advance with its client, that such money will be held as collateral to secure payment of future work.
The latter must be done under a lawful collateral title transfer arrangement and the firm must act honestly, fairly and professionally.
In such circumstances the FSA have confirmed that excess commission held by the firm will not be subject to the client money rules because such money would not fall within the definition of client money.
Interestingly, when we asked the FSA for clarification about a collateral title transfer arrangement, they suggested we take legal guidance ……Very helpful!!
| Ateb view: |
| None - for information only. |
| Action required by you: |
| If you are looking to or currently hold excess commissions to offset against future work then you should ensure that your terms of business reflect this. |
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12.
Recent FSA road shows
The FSA did the rounds again in September, with roadshows for IFAs, Mortgage and Insurance firms. The key messages were about more ‘Principles Based Regulation’ and TCF, quality of advice processes, and the Retail Distribution Review, which are all ‘big hitters’. However, there were some key messages worth reiterating:
- Stay on your toes for potential mystery shopping (remember we are talking about telephone calls and face to face mystery shoppers) as the FSA is undertaking various projects on TCF and quality of advice – be sure you know your T&C from your TCF!
- Familiarise yourself with the pages of the FSA website – they expect to see that you are keeping yourself up to date with the wide compliance issues and their objectives.
- Be aware of the enforcement actions, the key issues, and you will see the greater focus on Principles rather than Rules. Learn from these and make changes to your own business if appropriate.
- Be aware of the forthcoming changes resulting from the new COBS sourcebook from 1 November (this is for IFAs only and more details will follow in an ATEB bulletin).
Spotlight on TCF
In particular, the FSA was clear about its focus on TCF and its expectations for how far they expect firms to have moved on this. To bury your head in the sand and say that you must be treating customers fairly because you have been in business x years and have x number of customers is clearly not an option – unless you want to see your name up in lights on the FSA website!
- Examine what action you have taken on TCF thus far. Is it enough? Are you meeting both client and FSA expectations?
- Do you have a clear and documented plan for improvements and action points?
- Do you have management information (KPIs) in place which can demonstrate you are treating customers fairly, or will have by the deadline of March 2008
- Would your process stand up to FSA scrutiny? If you are unsure that it would, you should contact ATEB for further guidance.
Spotlight on Mortgage Fraud
The FSA also used the Roadshow to talk about various mortgage compliance issues, some of which are already well documented about quality of business. However, the FSA has recently undertaken project work with Lenders to identify mortgage fraud issues, particularly concerning the use of fraudulent documentation by clients. The FSA was keen to point out that the broker firms must be seen to be stepping up their own vigilance. Rather than just looking at the bottom line figures on pay slips and P60s etc, you are expected to look at the document as a whole and make a sense check as to whether it looks legitimate. They used examples of pay slips from files checked during FSA visits; type face varying throughout the document, employee numbers missing, no amounts in the boxes for tax and NI deductions, net pay being higher than gross pay etc We all know that these documents are obtainable quite easily, and need to ensure that fraud checks are part of our usual sales process. We suggest it could be included in the admin process with the usual anti-money laundering checks without too much hindrance.
| Ateb view: |
| If you were not able to make the road shows you see from the above that you missed a real treat! |
| Action required by you: |
| Be aware of the above issues and speak to ATEB were you are unsure. |
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13.
Quality of Advice – Mortgages
This could actually be a standing topic on the ATEB newsletter!
Once again, the issue of quality of mortgage business has given the FSA cause for concern. It is concentrating effort and resources in this area and is determined to raise the bar for all firms. It is compounded by recent television and news bulletins, and the issues with Northern Rock.
Record keeping is vital. If the FSA picked up one of your files today, would it clearly show:
- Sufficient details of the client’s needs and circumstances – Know Your Customer data? Do you keep notes of meetings / telephone calls to show the audit trail?
- Evidence that clients have sufficient disposable income to afford the mortgage now and in the future, together with the other costs of owning a home?
- Proof that you have provided the IDD and the KFI and explained both to the client?
If your fees are variable, do you have a signed fee agreement with the exact amount?
| Ateb view: |
| Mortgage firms continue to be under great scrutiny and you should review your sales process regularly to ensure it is up to scratch. |
| Action required by you: |
| If you feel you need advice or assistance on best practices, give ATEB a call. |
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14.
Mortgage thematic ‘affordability’ visit – feedback
We thought you would be interested to hear about an affordability visit to an ATEB firm:
This themed visit was the second visit the firm has had. The first was a more general FSA Mortgage visit which went reasonably well, with an ATEB based suitability letter being taken away as an example of good practice. The two FSA representatives checked 12 files over approximately 4 and a half hours and then approx an hour and a half dealing with questions and feedback on their findings. The visit was very focused with only a half a dozen questions on TCF, around how the firm had approached this and what changes they had made in meeting the TCF requirements.
- They then questioned how the firm went about gathering details in support of income and expenditure. How the firm established affordability pre and post new mortgage being in place.
- The firm had recently adopted the new ATEB Mortgage fact find as the FSA had previously commented that the affordability section on the old versions of their fact find. The FSA seemed happy for the firm to adopt the ATEB format.
- The FSA questioned some of the figures documented within the list of monthly outgoings and commented that they were unrealistic. They checked the figures against any evidence held on file, for example payslips, bank statements, bills, etc. They were concerned about maintenance moneys being taken into consideration where there was no evidence that they were being received regularly.
- State benefits were also a concern where the client's circumstances could change or legislation could change thus removing these benefits and bringing affordability into question.
- Self employed where no records of accounts were available; they suggested that bank statements should be sought and assessed and or letters from accountants confirming income should be requested.
- FSA commented that any regular or irregular bonuses should be assessed closely and generally should not be included as appropriate income for mortgage purposes.
- Where it was clear that affordability was not an issue and the adviser recommended an interest only mortgage, the FSA questioned why a repayment mortgage was not recommended.
- Where interest only was recommended, repayment vehicles were mentioned in the suitability letter but there was no corresponding record of repayment vehicles in the fact find or budget planner.
- They passed comment that the customer was given ‘options’ and was left to choose the product although the firm was promoting an advised service.
- The firm did not factor in credit card payments into the monthly expenditure calculation that were not fully paid off by the remortgage.
- For a first time buyer who had been living with their parents the firm did not factor in realistic expenditure for utilities, food etc. They had simply based their advice on a small entertainment figure.
| Ateb view: |
| It is clear from the visit that the FSA expect firms to give due respect to ‘affordability’ as it is the key part in assessing and recommending whether a mortgage is suitable. Should the client have difficulties in the future and they default on their loan, the chances are they will complain that their adviser did not properly assess whether they could afford the loan. If the material evidence held by the adviser is not robust then it is likely that any complaint against them will be upheld. |
| Action required by you: |
| Keep an eye out for findings of the themed review which will be available at the end of the year. |
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15.
Payment Protection Insurance - Update
This article outlines findings from the recent FSA review of the sales processes and systems and controls relating to the sale of payment protection insurance (PPI). They visited 126 small firms as part of this work, focussing on three sectors:
- motor retailers;
- loan brokers; and
- mortgage brokers.
This latest phase aimed to test the industry against five key outcomes. The outcomes the FSA were testing were that customers are:
- told that PPI is optional, where this is the case;
- given clear information about the product and what it will cost;
- given the assistance they need to be clear about what they are eligible for under the policy, and what the exclusions are;
- where advice is given, recommended a policy that meets their needs; and
- offered a fair refund if they cancel their policy.
Key concern areas:
- Over a third of small firms failed to clearly explain the PPI product, including significant exclusions and limitations.
- A third of firms did not ensure that the customer was eligible to claim against the product.
- Less than a third of statements of demands and needs reviewed were appropriately tailored to the customer.
- For single premium policies, less than a third of customer files could evidence that the policy met the customer's demands and needs.
- In a third of small firms, there were inadequate systems and controls in place around the sales process.
Overall the FSA were not satisfied that firms were treating their customers' fairly when selling PPI.
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16.
Protection and general insurance
ICOB is being revised. However the changes will not take place until January 2008, after which there will be a transition period.
For general insurance business, such as household, motor or pet policies, this means moving to principles and high-level rules, except where detailed provisions are required by European Union Directives.
For protection products (Payment Protection Insurance (PPI), critical illness cover, income protection and term assurance), the FSA is proposing a small number of additional rules carefully targeted to improve selling practices in areas where consumers are losing out.
Some of these new measures will apply to all protection products, for example, a new standard to ensure balanced oral disclosure to help consumers make informed purchasing decisions. One of these - a requirement for firms to provide information on price orally to the customer where a discussion takes place - will have particular impact on PPI markets, and some measures will apply only to PPI, such as extending the cancellation period from 14 days to 30 days.
| Ateb view: |
While this will mean more flexibility for firms, the FSA will require the same standards of conduct and essential consumer safeguards to remain.
Less prescription could however mean a greater chance of getting it wrong. |
| Action required by you: |
ATEB will update its web based manual with relevant changes, although, you may wish to read through the various papers.
http://www.fsa.gov.uk/pages/Library/Policy/CP/2007/07_11.shtml |
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17.
General Insurance - Advised or Non-Advised?
Clearly, it is important your customers are left in no doubt about the level of service they receive when you discuss general insurance products with them.
Often however, when we examine files as part of our file checks it is not always apparent whether clients have received advice or just information. We often see conflicting information for example the firm appears to be making a recommendation in once sentence but includes the phrase “you choose”.
You need to make sure if you are working on an advised basis that your paperwork reflects this and your firm should monitor this on a regular basis.
| Ateb view: |
| Firms are paid well for giving advice and should avoid phrases such as “you choose”. This normally results from insufficient questions (a lazy process) being asked. Firms should therefore consider improvements to their fact find process. |
| Action required by you: |
The fact sheet can be found at:
http://www.fsa.gov.uk/pubs/other/factsheet_sales.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
