Investment Firms

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1. Client money accounts – is the money safe?
2. Transferring protected rights into SIPPs
3. New initial disclosure document for investment advice
4. Improving your quality of advice process
5. Absolute return funds - warning
6. Treating customers fairly – update
7. The Angel GABRIEL is here to save you all, but will he help complete it for you?
8. How do you display your employers’ liability certificate?
9. FSA fines five motor dealers for PPI failings

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
Mortgage Related (M)				M		M			M

 

1. Client money accounts – is the money safe?

The vast majority of you will not hold client money, so will not be affected.

In light of the current turmoil in the banking markets, have those of you who do operate client money accounts considered if the money is safe?

We know from discussions with trade bodies from the general insurance market (where the holding of client money is common) that there is concern that such accounts have limited protection under the Financial Services Compensation Scheme.

Ateb view:

It would be too easy to dismiss this issue as ‘something that will never happen’. Personally I would rather be safe than sorry and take every precaution necessary.

Action required by you:

You should consider this matter carefully and understand what protection you receive under the FSCS. Does your disaster recovery plan cover this eventuality?

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2. Transferring protected rights into SIPPs

From 1 October this year, people will be able to contract out of the State Second Pension into a SIPP and transfer previously built up National Insurance rebates ("protected rights") from a personal pension into a SIPP. As with any advised transaction, the FSA expects firms to ensure that the advice is suitable and based on clients’ personal needs and objectives.

This also includes an assessment of whether there is a real need for the investment flexibility and control associated with a SIPP contract, a clear outline of the costs involved, and how the recommendation is of benefit to the customer's needs, objectives and attitude to risk.

The FSA has published a policy statement confirming that when advising on contracting out into a SIPP, firms will also need to provide a comparison of projected retirement income from the SIPP versus potential benefits from the State Second Pension. This requirement already exists in relation to contracting out into ordinary personal pensions.

The FSA is currently undertaking a review to assess the quality of advice on transfers into personal pensions, including SIPPs, since April 2006. The FSA’s findings are due to published later this year.

Ateb view:

Vital reading if you are involved in this market.

Action required by you:

Look for gaps in your current transfer process. You can read the full press release here.

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3. New initial disclosure document for investment advice

We have allowed the water to settle on the introduction of the Services and Costs Disclosure Document quite simply because we wanted to understand all the implications and have a good read of the Policy Statement to make sure all the implications had been considered. There have also been the typical website problems that seem to affect all new systems that the FSA introduce.

We are now confident however that implementing the new document is the correct thing to do for most firms and your ATEB consultant will be discussing this with you over the coming weeks.

Background
The FSA has introduced a new single disclosure document for investment business. The Services and Costs Disclosure Document (SCDD) came into effect on 6 August and replaces the Initial Disclosure Document (IDD) and Menu.

The new document is less prescriptive and provides firms with greater flexibility when disclosing information to customers about their service and costs. There is a wide variety of word formats that can be used to meet your particular needs.

In order to produce your own version, click here.

You will find that the system allows you to build your own disclosure documents by answering a few questions. A template will be produced, but it is important that you read and check the notes provided by the FSA.

The FSA has also updated the Combined Initial Disclosure Document (CIDD) for consistency between the SCDD and the investments section of the CIDD.

There will be a transition period until 31 August 2009 to enable firms to use up existing stocks of the IDD and Menu if they wish.

 

Ateb view:

We recommend that firms now move to the new document, although it makes sense to use up old forms first.

Action required by you:

Make sure that you are using the new document by August 2009. More information is available here.

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4. Improving your quality of advice process

This is now the 3rd in a series of Fact Sheets that the FSA will continue to publish over the coming months. They are designed to focus on the different areas of the Advice processes they reviewed during phase II of their Quality of Advice Project.
The examples outlined are designed to help firms consider their own processes for assessing customers’ needs. There may be other ways of achieving the same outcomes and complying with FSA rules and principles and you should consider the relevance of these examples to your business, as you may choose an alternative approach.

Customer Information
A firm would always obtain all of the necessary information required to understand the essential facts about the customer when making a personal recommendation. In addition to these basic customer details, the FSA would like you to consider the following;

• Financial situation – do you gather facts about income/expenditure, savings/investments and assets/liabilities?
  
  
• Investment objectives – Is the customer’s risk profile assessed and the purpose and period of the investment established?
  
  
• Knowledge & Experience – do you gather sufficient information about the frequency of previous transactions and assess whether the customer understands the complexity of the risks and the intended recommendation?
  
  
• Impact of your Advice – do you gather tax status information and entitlement to state benefits and incorporate the impact of your advice on these?

Assessing Needs and Objectives
When assessing a customer’s needs before making a recommendation you should consider the following:

• Area of Advice/Need – If more than one need, do you highlight and advise on all needs, or stick with the need the customer has asked about? How do you warn them of the advice being limited to that one need or more needs and the potential consequences of this? Do you assess the customer’s affordability of the need identified?
  
  
• Risk Profile – Does the Firm have a consistent way of assessing a customer’s Risk Profile? Are your risk category definitions clear and understood by the Adviser and the Customer? Is the risk attitude explored across the different objectives? Do your advisers understand how to use the Risk Profile in practice when making a recommendation?
  
  
• Change in Circumstances – When carrying out customer reviews do you ensure the information you hold is up to date and reflects any changes in circumstances, such as employment, income, tax status, health, investment objectives, risk attitude? Does the firm consider whether previous recommendations remain suitable?

The Fact sheet goes on to give some good examples and poor examples of Practice.

Ateb view:

Teaching granny to suck eggs, I hear you say? The fact remains that these fact sheets are being designed following the results of the Quality of Advice Review Project and are, therefore, based on actual practices which exist in the market place. It is certainly worth considering the comments made and seeing if your firm follows these processes.

Action required by you:

Ask yourself the questions raised in this article. You may not agree with them all, but they come directly from the proverbial horse’s mouth! Another good CPD entry – Check out the fact sheet here.

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5. Absolute return funds - warning

Investors and advisers spooked by the current turmoil in share markets are turning increasingly to absolute return funds as a safe haven

These are a relatively new concept and are becoming increasingly popular. Indeed, in years to come we may see risk profiling change and be measured using Absolute Return Funds terminology - ‘cash + 1’ etc.

Enough speculation for now, however:

Absolute return funds achieve their steadier results through a combination of strategies. One is to invest in a wide range of assets, including not only shares, bonds and cash, but also the likes of property and hedge funds. It can also mean using derivatives that allow investors to bet on the future price movement of an asset. Crucially, this allows investors to make money when an asset is falling, as well as rising, in price.

Used properly, these tools should allow absolute return funds to do better than straightforward equity or bond funds when markets are falling, but the other side of the coin is that they are likely to lag behind their more conventional rivals when markets are rising.

One problem investors face is that the funds labelled “absolute return” use widely differing ranges of assets and investment tools. Some use a diverse range of assets, including shares, bonds and money market investments, whereas others concentrate almost exclusively one asset class such as bonds. Some use derivatives while others do not.

Therefore, while some absolute return funds have vastly out-performed traditional funds over the last year, others have made significant losses.

There is a key message here:

• Absolute Return Funds in the right hands can prove to be very effective.
  
  
• Absolute Return Funds in the wrong hands could be disastrous.
  
  

They are complicated and fraught with danger. Any firms providing advice on such funds or including them as part of their investment portfolios, must ensure that those advising have the requisite expertise and are signed off as competent to do so. They should be able to demonstrate knowledge through training, CPD and testing.

Equally, those supervising such advice should be equally competent.

Ateb view:

You have been warned!

Action required by you:

Ask yourself 3 simple questions: Does your firm offer advice on Absolute Return Funds? If you do, are the individuals and supervisors competent to do so? Do you believe that potential risk outweighs the potential benefits?

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6. Treating customers fairly – update

The FSA embarked on a three-year regional programme in January 2008 to assess how managers in small firms approach Treating Customers Fairly (TCF) and how they embed TCF into their businesses.

The assessment is based on the small firm’s management behaviours framework. The FSA believe that the management of small firms can only ensure good intentions result in good outcomes for consumers, if they establish and maintain the right behaviours.

The assessment looks at:

• the relationship the firm's management has with its staff
• how it communicates TCF to its entire staff (not just advisers)
• what controls, including management information (MI), it has in place to demonstrate consistently fair treatment of customers.

In their communications with small firms, they are continuing to emphasise the importance of embracing TCF. They will, however, continue to take a tough stance with those firms who choose not to raise their standards, including, where appropriate, the use of enforcement action.

They are continuing to make use of case studies/examples of good and bad practice to illustrate the various ways in which you can meet their TCF obligations. ATEB will endeavour to keep you up to date with the latest FSA views.

Next Step for Firms
The FSA expects all firms to undertake a significant amount of work to ensure they meet the December 2008 deadline. They believe you will have to:

• Be able to demonstrate that you are consistently treating customers fairly (i.e. your MI or other measures should show good results). The FSA will expect to see evidence to demonstrate that you are meeting those TCF Outcomes which are relevant to your business. The evidence expected will vary with the size and complexity of your firm.
  
  
• Be able to demonstrate that senior management has instilled a culture within the firm, whereby they understand what the fair treatment of customers means, where they expect their staff to achieve this at all times and where errors are found, they are put right promptly and learned from.
  
  
• Be appropriately and accurately measuring performance against all customer fairness issues materially relevant to their business, and be acting on the results.
  
  
• Be demonstrating through those measures that you are delivering fair outcomes.
  
  
• Have no serious failings – whether seen through MI or known to the FSA directly, including in areas of particular regulatory interest previously publicised by the FSA.

You will be expected (following the interim deadline of March 2008) to already have appropriate measures in place to test whether you are treating your customers fairly (i.e. to be able to measure outcomes through MI). This reflects Principle 3 of the Principles for Businesses that ‘a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems’, as well as the specific SYSC requirement that ‘a firm must take reasonable care to establish and maintain such systems and controls as are appropriate to your business’.

The FSA are strongly encouraging firms to consider the examples of good and bad practice in the context of your own business model. These can be accessed via the FSA website on

GI Firms
http://www.fsa.gov.uk/pages/Doing/small_firms/general/tcf/report/case1/index.shtml

Financial Advisers
http://www.fsa.gov.uk/pages/Doing/small_firms/general/tcf/report/case2/index.shtml

Mortgage Broker
http://www.fsa.gov.uk/pages/Doing/small_firms/general/tcf/report/case3/index.shtml

The FSA has designed a TCF MI Matrix which sets out examples of MI which firms should be collecting and using to measure their performance against the relevant TCF outcomes. Such information should be drawn together regularly, reviewed by managers/principals and acted upon where it indicates potential risks to the TCF outcomes being achieved.

The matrix includes some examples taken from firms achieving good outcomes with the help of compliance consultants. An FSA supervisor will expect the firm to be able to explain how your MI relates to the TCF outcomes.

The FSA has also noted that some firms have found customer feedback questionnaires to be helpful. They also observed that these only provide useful information on whether TCF outcomes are being achieved where they go beyond requesting feedback on customer satisfaction by gathering information on actual customer understanding of products, services and risks.

You may find it useful to check out the MI Matrix here.

Ateb view:

There is no getting away from this one, be you a small firm or a large one. It is absolutely vital that you are adequately prepared.

Action required by you:

You must ensure that you understand the above, have implemented the requirements detailed and are able to discuss and demonstrate confidently how TCF applies to, and has been incorporated into, your firm. If you remain in any doubt about the requirements, please discuss with ATEB.

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7. The Angel GABRIEL is here to save you all, but will he help complete it for you?

GABRIEL
Gathering Better Regulatory Information Electronically

GABRIEL is the FSA’s new web based electronic reporting system, designed to make it easier for firms to submit regulatory data. GABRIEL will be replacing the reporting part of the Firms Online system from 1 October 2008 and will become the FSA’s central system for the collection, validation and storage of regulatory data. This system will provide the basis for risk based supervision.
With the move to GABRIEL the FSA is making 2 important changes to RMAR and MLAR. The FSA has at last realised and identified that some data did not actually contribute to RMAR’s effectiveness and have, therefore, reduced some of the RMAR data requirements by 30%. Some of these changes include removing redundant questions, making certain questions mandatory, altering the layout and wording in some sections and tailoring the schedule so that only questions relating to your firm’s activities need be completed.

When will the changes to RMAR take place?
The changes are being implemented from 30th September 2008 and applies for all RMARs with reporting periods ending on or after the 30th September 2008.

Here are some of GABRIEL's key features:

• Firms will be able to view online all their reporting requirements on a rolling 12 months basis
• Your PU (Principle User) can be easily identified on line
• Data can be submitted independently if required
• Online returns are tailored, based on the firms' regulated activities and accounting reference date
• After GABRIEL goes live, firms will be able to access all GABRIEL submissions online
• GABRIEL will provide online system and policy help texts
• Firms can download and print returns.

There are 4 ways to submit regulatory data - Online Forms, Offline Forms, Web Upload and Direct Communication. However, the FSA sees the Online Form as the favoured method of submission.

How do we sign up for GABRIEL?
If you are already registered with Firms Online, your PU (Principle User) will become the PU for GABRIEL. However, this isn’t an automatic cross-over. You are required to activate your new account following an activation email from the FSA. New usernames and activation passwords will be given via email.

GABRIEL Online Training
Something the FSA is giving away for FREE!! An online e-learning package lasting approximately 45 minutes (if you listen to everything the guy has to say) which will give you a preview of the new system and how it works.
It is designed for all firms who will report using GABRIEL and will cover topics such as:

• How to register for GABRIEL
• Set up and manage users
• Prepare validate and submit returns online
  View the system and policy help text for support
• Request resubmission of data
  

Ateb view:

They could have thought of a better name!! However, at last the FSA have come up with a system which appears to be user friendly. This should in effect make the submission of your regulatory returns a lot quicker and simpler.

Action required by you:

Spend some time on the e-learning training course to give you an insight in to the new system. You can access this here. Ensure you have activated the new system and are familiar with logging on. Start your return early as there have been significant teething problems!

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8. How do you display your employers’ liability certificate?

With effect from 1 October 2008, employers will be allowed to display their employers’ liability certificate in an electronic format, so long as it remains readily accessible to all employees.

The changes come under the Employers’ Liability (Compulsory Insurance) (Amendment)
Regulations 2008 (the "2008 Regulations"), which amend certain provisions of the Employers’ Liability (Compulsory Insurance) Regulations 1998.

The 2008 Regulations also removes the requirement for employers to retain their employers’ liability certificates for a 40-year period.

However, this could cause problems for what is known as ‘long-tail’ industrial disease claims, where illnesses may not become apparent or be diagnosed for many years, for example asbestosis and mesothelioma. The 40-year requirement was introduced to make it easier for workers to raise claims for industrial diseases.

Ateb view:

None for information only.

Action required by you:

Firms should make an assessment based on their individual circumstances. However, it can already prove problematic to trace policies which pre-date the introduction of compulsory employers’ liability insurance cover or where companies have ceased to trade. As a general rule, therefore, we would suggest that it is in the employers’ best interests to retain a copy of the Certificate of Employers Liability Insurance, for if no insurance records can be found, the employer will be responsible for payment of the claim.

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9. FSA fines five motor dealers for PPI failings

If you advise on premium protection policies, this article will be of interest.

The Financial Services Authority (FSA) has recently imposed fines totalling more than £175,000 on five motor retailers for serious breaches relating to the sale of Payment Protection Insurance (PPI), which exposed a total of 2,175 customers to the risk of being sold unsuitable PPI policies.

In an update on the thematic review of sale of PPI, the FSA has set out that, due to the poor findings from its recent work, it is escalating its regulatory intervention.

The FSA will consider the action it will take to deal with ongoing non-compliant sales practices and consider actions to identify and remedy non-compliant past sales, using a range of regulatory powers at its disposal.

Jon Pain, Managing Director of the FSA's Retail Markets, said:

"Tackling poor PPI sales practices remains a high priority for the FSA. We will intervene to ensure consumers are protected and are considering what regulatory powers are the most appropriate to deliver fair outcomes. Firms may wish to consider stopping selling single premium PPI sold alongside unsecured personal loans, given the continuing problems in the sales of this product."

The FSA's work on PPI included a mystery shopping programme that captured customer experiences of face-to-face branch sales of single premium PPI when sold alongside an unsecured personal loan. The results showed:

• very few customers were told that the cost of the payment protection would be added to the loan as a single premium and that interest would be charged on this amount;
  
  
• only half of customers said that they were told about the key limitations and exclusions of the policy - this is fundamental to establishing a customer's need and eligibility; and
  
  
• many customers were not told of both the monthly cost and total cost of their PPI - at the worst performing firms very few customers were given adequate information on the cost of their policy.

The FSA will publish a further update on the third phase of its thematic work in early 2009. The FSA is considering the Financial Ombudsman Service's (FOS) concerns, raised in its wider implications letter, about PPI complaints and will be working with the FOS on the appropriate response to this serious matter, in the context of FSA's broader strategy.

Ateb view:

Don’t be caught out, review you procedures now!

Action required by you:

The FSA have started to produce more practical assistance. Most firms will find that they are already following the guidance or similar, but it doesn’t harm to have this reinforced. More information can be found here.

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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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