regulatory matters july/august event - 2014. compliance bulletin and regulatory analysis updates

Regulatory Matters July/August Event - 2014

Compliance Bulletin and Regulatory Analysis Updates

Sesame Bankhall Group Ltd. Commercially confidential 2012. www.bankhall.co.uk

• Bankhall issue three types of Compliance Communication:

• Weekly Regulatory Update (RU), every Monday, ‘Bankhall Weekly’- ‘High-level’ summary of regulatory information drawn from FCA, FOS etc

• Monthly Compliance Bulletin - on the last Thursday of each month- Summary of important information issued via the weekly regulatory updates

within the month;- A summary of all new and amended compliance guidance published within

the month.

• Ad-hoc Regulatory Analysis- Further in depth analysis when required on key topics

• Rag rated (Red, Amber, Green) to highlight issues that we feel are particularly important

• In response to your feedback, we have returned to issuing a more comprehensive monthly Compliance Bulletin, via email on the LAST THURSDAY of each month. These contain a round up of:

• * Information relevant to investment, mortgage & GI firms;• * A summary of the important information issued via the weekly Regulatory Updates within the month;• * Further in depth Regulatory Analysis, where required, including guidance on what you need to consider and/or do

differently, following regulatory changes; and• * A summary of all new and amended compliance guidance published within the month.

• Information is drawn from FCA, FOS and various regulatory publications• Designed to help you identify anything that has come to light that week which may have implications on your business.

• The REGULATORY UPDATE also provide information about the next steps to be taken, for example if further analysis and guidance will follow within a Compliance Bulletin, it will say so.

• The REGULATORY UPDATE also provide a summary of all new and amended compliance guidance published within the previous week, including the reasons for the change; and any other information we think you need to know.

• It’s a general WEEKLY NEWSLETTER

• IT IS WORTH NOTING AT THIS POINT THAT ALL ARTICLES PUBLISHED ARE RAG RATED – [RED, AMBER AND GREEN] TO HIGHLIGHT THE ISSUES THAT WE FEEL ARE PARTICULARLY IMPORTANT OR REQUIRE ATTENTION

• In response to your feedback, we have returned to issuing a more comprehensive monthly Compliance Bulletin, via email on the LAST THURSDAY of each month. These contain a round up of:

• * Information relevant to investment, mortgage & GI firms;• * A summary of the important information issued via the weekly Regulatory Updates within the month;• * Further in depth Regulatory Analysis, where required, including guidance on what you need to consider and/or do

differently, following regulatory changes; and• * A summary of all new and amended compliance guidance published within the month.• • Finally a REGULATORY ANALYSIS is issued on an ad hoc basis whenever

Regulatory Matters Regulatory Update


Mortgage Market Review

• Implementation date 26th April 2014

• Dedicated suite of templates within Bankhall website

• On site compliance support available if required

• New FCA consumer guide and AMI / CML / IML joint guide published(CB 21/14)

Consumer Credit Regulation

• 1st April - transferred from the OFT to the FCA.

• Firms with interim permission must apply for full FCA authorisation / VoP

• The FCA has written to all firms with details of own specific application period.

• FCA indicated that an ‘authorisation pack’ will be made available

(RA30/14 and CB 24 / 14)



FCA supervision on post RDR implementation

• FCA three stage process.

• Stage 1 published July 2013 – Adviser Charging and Disclosure

• Stage 2 published May 2014 – Independence and Disclosure

• Stage 3 commences July 2014 - Disclosure

• FCA firm charging structure review form – Disclosure to clients

• Assessment tool

• Planned to be used by FCA in stage three of review process

• Interactive Excel and PDF checklist versions

• Various categories covered

(RA37/14 and RU week ending 6th June 2014)

RA 37 /



FCA alert on SIPP advice

• FCA concerns in January 2013

• Further supervisory work, including visits and appropriate action

• FCA has issued a further alert

(RU week ending 2nd May 2014)

FCA concerns about risk profiling

• Ongoing FSA / FCA supervisory work

• Failings found in earlier work carried out - ongoing issues

• Issues identified at the time of file reviews

• Support available

(RU week ending 16th May 2014)



The transfer of clients to post-RDR unit classes (‘clean’ units)

• FCA final guidance, FG14/4

• Ban on payments to platforms effective 6th April 2014

• Ban on legacy payments effective 6th April 2016

• Move to new ‘clean’ unit classes. Conversion or switch

• What is advice ?

(RU week ending 9th May 2014, Compliance bulleting CB24/14

RA 00001/14)



Commercial insurance intermediaries - conflicts of interest and remuneration • FCA thematic review (TR 14/9) published - (RU 30th May 2014)

• Seven of the largest intermediaries who serve small business clients assessed

• FCA believe control frameworks and management information have not developed at the same pace as business models.

• Increased risk of conflicting interests where firms acted as agent for both the customer and insurer in the same transaction

• Reliance on disclosure as main way to address conflicts of interest rather than having effective control frameworks in place

• Disclosure generic and unlikely to meet information needs

• Bankhall Regulatory Analysis to follow


Suitability and Status Independent and Restricted Advice

Regulatory MattersAgenda

Status

• Definition: Independent and Restricted advice

• FCA thematic reviews

• Disclosure of status and adviser charging

• CPD requirements and PII issues

Suitability

• Independent and Restricted suitability considerations

• Panels and Platforms

• Centralised Investment Propositions

• Complex Products

• Product wrapper investing

• Risk and suitability assessments

Status Considerations


Regulatory MattersIndependent Advice

Independent advice’ is defined in the FCA handbook (COBS 6.2A.3R) as:

‘A firm must not hold itself out to a retail client as acting independently unless the only personal recommendations in relation to retail investment products it offers to that retail client are:

• Based on a comprehensive and fair analysis of the relevant market; and

• Unbiased and unrestricted ‘


Regulatory MattersRestricted Advice

‘Restricted advice’ is defined as:

• a personal recommendation to a retail client in relation to a retail investment product which is not independent advice; or

• basic advice

• A firm can be ‘restricted’ if it is tied to a specific product provider or providers, or if it limits the scope of advice they provide.

• A typical Bankhall firm offering restricted advice services will either be:

(a) Offering products from a single or limited number of companies;

(b) Offering basic advice on stakeholder products;

(c) Offering limited types of products; or

(d) Offering limited types of products from a single company or from a limited number of companies.


Regulatory MattersFCA Thematic Review – RDR

• Key RDR objective – to increase transparency for consumers on the services offered by advisers and the charges for these services.

• FCA conducting a three stage thematic review into RDR implementation

• FCA warning of regulatory action if no improvement

• Stage three commences mid July- due to report Q1 2015

• Impacts upon both restricted and independent firms


Regulatory MattersFCA Thematic Review – TR 14/06

‘We found that a high proportion of firms are failing to correctly disclose to clients the cost of their advice, the type of service they offer (i.e. independent or restricted), and the nature of the ongoing service they provide.’

‘In our view, the level of non-compliance we identified and the failure of firms to meet their regulatory requirements is unacceptable.’


Regulatory MattersDisclosure Issues

FCA has highlighted disclosure issues in the following areas:

1. Adviser / Firm Status

2. Generic charging structures

3. Client specific charges

4. Ongoing Services


Regulatory Matters1. Status Disclosure

• Independent advice:

‘We will advise and make a recommendation for you after we have assessed your needs. Our recommendation will be based on a comprehensive and fair analysis of the market.’

• Restricted advice - limited number of companies:

‘We will advise and make a recommendation for you after we have assessed your needs. We only offer products from a limited number of companies. You may ask us for a list of the companies whose products we offer’.

• Independent advice - use of relevant market:

‘We will advise and make a recommendation for you after we have assessed your needs. We only consider ethical and socially responsible investments’


Regulatory Matters

Restricted Disclosure

• Firms providing restricted advice services must disclose the nature of their restriction, in writing to a retail client prior to providing such services.

• Disclosures made to a client should not mislead them as to the level of service being offered

• If a firm is offering restricted advice services, this needs to be made clear i.e. the word ‘restricted’ must be used in the disclosure, both written and orally.

• Flexibility to allow firms to describe exactly how their service is restricted because the restricted services of different firms may differ considerably; for example:

• One firm may offer advice on one or two products from a particular product provider

• Another firm may advise on all but a few high risk products.


Regulatory Matters2. Generic Charging Structure

• Disclose in writing, in good time before making the personal recommendation

• Need to clearly show when charges will start to accrue

• Percentage based - clear monetary examples

• Initial and ongoing advice charges

• Hourly rates

• Typically disclosed via an IDD or SCDD


Regulatory Matters3. Client Specific Disclosure

• Firms are required to agree and disclose the total adviser charge • as early as practicable,• in a durable medium • in total when payable over a period.

• Good time to disclose is at end of first meeting but must be prior to execution of transaction

• Problematic if disclosed after chargeable work has commenced

• Firms must disclose the total adviser charge in cash terms both for the initial and, if applicable, the ongoing services

• Exception for transfers with fluctuating amounts – best estimate and then confirm in suitability letter


Regulatory Matters3. Client Specific Disclosure

• An open-ended percentage charge for initial advice on a regular contribution investment is not acceptable under COBS 6.1A.22R

• Example: charging 3% on all contributions for a regular premium pension or ISA

• An ongoing charge must either be to pay off an agreed initial charge or be for ongoing advice

• Avoid the temptation to ‘disguise’ as an admin charge

• For ongoing adviser charges based upon percentages of funds under management, clarify that amounts may fluctuate

• Service and Payment Agreement (SAPA) available to assist in recording and agreeing client specific charges


Regulatory Matters4. Disclosure of ongoing services

• Clear representation of ongoing services and cost – informed decision

• What to expect and when

• Explanation of terminology

• ‘Annual Review’ – when, how, by whom, who will arrange?• Valuation – when and what medium?

• Clients right to cancel

• Maintain records to evidence delivery of ongoing services


Regulatory MattersFCA’s disclosure document assessment tool

• June 3rd 2014 - FCA launched disclosure documents assessment tool

• Available as a PDF or Excel spreadsheet.


Regulatory MattersFCA’s disclosure document assessment tool

FCA expectations of tool usage

‘This template is not compulsory but we would encourage all firms that are subject to the RDR requirements to complete the template and save a copy for their records’.

‘We plan to use this to assess disclosure in the third cycle of our review’


Regulatory MattersOther matters - CPD and PII

‘…..a firm must ensure that a retail investment adviser who has been assessed as competent….remains competent by competing a minimum of 35 hours of appropriate continuing professional development in each 12 month period’ (TC 2.1.15R)

‘A firm must effect and maintain at all times adequate professional indemnity insurance cover for all the business activities which it carries on, or for which it is responsible.’ (IPRU(INV))

PII

Suitability Considerations


Regulatory Matters

• In order to be independent, all personal recommendations to retail clients (in relation to retail investment products) must be:

• Based on a comprehensive and fair analysis of the relevant market; and• Unbiased and unrestricted

• Firms must consider all products that fall within the Retail Investment Product definition.

• Some non RIP products must also be considered for general suitability (whether independent or restricted)

Retail Investment Products Non Retail Investment Products

Suitability

Independence


Regulatory MattersRestricted advice – Suitability Considerations

Independent

• All retail investment products considered

• Wide range of solutions

• Complex options

• Recommendation must be suitable

Restricted

• Can be by product or provider

• Must be clearly disclosed

• Fewer Options

• Recommendation must still be suitable

• Refer if no suitable solution available


Regulatory MattersPanels and Platforms

Panels

• Some firms have introduced panels

• Can be independent if whole market origin and regularly reviewed

• Adviser must be able to go ‘off panel’ for suitability purposes

• Clearly documented process required

Platforms

• Many firms utilise platforms

• Part of overall solution • If independent must be

able to go off platform for suitability

• If restricted to platform, must refer if no suitable option

• Clearly documented process required


Regulatory MattersCentralised Investment Propositions

• Can be beneficial to both clients and firms

• Must ensure that solution is suitable for individual clients

• Not a ‘one size fits all’

• Sufficient initial due diligence and ongoing reviews

• Firm still responsible for advice given using third party solutions

Key considerations:

• Is cost of solution in clients best interest and clearly presented?

• If improved performance is driver, why is new investment likely to outperform existing? Is this documented?

• Is advice suitable given tax implications and client specific objectives?

• Can you evidence that advisers are competent in CIP use?

• Do you assess relevant management information in respect of CIP?


Regulatory MattersCentralised Investment Propositions

Good Practice:

• Client segmentation and identification of typical client needs

• Formulate list of needs prior to researching third party solutions

• Strong due diligence on provider

• Adviser training on identifying when a CIP is not suitable

• Specific fund range (non CIP) for clients not wanting ongoing advice

• Use of MI to allow board to monitor adviser use of CIP – RAG

Poor Practice:

• No evidence of initial due diligence prior to selecting CIP

• Asset allocation model but no ongoing reviews offered

• No assessment of client tax position (CGT) when recommending switch to CIP

• Inheritance of CIP through merger but no further due diligence

• One CIP and no option for advisers to research ‘off CIP’ solutions

• Incentive scheme rewarded CIP use more than non CIP


Regulatory MattersIndependent advice: Main additions to product range post RDR

• Post RDR ‘Retail Investment Products’ > ‘packaged products’

• Increased ‘product range’ for independent advisers

• Main additions to product range

• Exchange traded funds

• Investment backed Structured Products

• Unregulated Collective Investment Schemes

• VCT and EIS

• Strong suitability concerns with some products

• ‘Consider’ not ‘recommend’


Regulatory MattersComplex Products – Non Mainstream Pooled Investments

Some

Special

Purpose

Vehicles

Qualified investor schemes

Traded Life PolicyUCIS

• Pooled investments or ‘funds’

• Unusual, speculative or complex assets, structures or strategies.

• Cannot promote to ‘ordinary retail investors’

• Consider for clients who meet sophisticated / high net worth definition

• Classed as ‘Specialist’ investments


Regulatory MattersCustomer Types

• Sophisticated Investors - retail clients with extensive investment experience and knowledge of complex instruments, who are better able to understand and evaluate the risks and potential rewards of unusual, complex and/or illiquid investments such as NMPIs.

• High Net Worth Customers - retail clients meeting the criteria for categorisation as high net worth individuals. Among the criteria for being classed as a high net worth individual, is having an annual income of more than £100,000 or having investable net assets of more than £250,000.

• Both must meet exemptions under the Promotion of Collective Investment Schemes (PCIS) Order, the Financial Promotions Order (FPO) or the FCA rules.

• Clients certify that they meet criteria – due diligence by adviser


Regulatory MattersComplex Products – ‘Non Core’

• Not classed as NMPI by FCA but not considered ‘mainstream’

• ‘Unlikely’ to be suitable for ordinary retail clients

• Share NMPI characteristics - complexity and risk.

• Suitable only for retail clients who understand the complexity and risk.

• Individual risk appetite must be consistent with that of product

‘Guide to assessing suitability of non-core and specialist investments’

VCT Film PartnershipEIS Direct

share investment


Regulatory MattersInvesting via a product wrapper

• Product wrappers such as SIPP or Platform

• Regard as a ‘direct’ investment for suitability reasons

• Still subject to the NMPI marketing restrictions.

• FCA concerns in this area published July 2103

• Further alert issued July 2014


Regulatory MattersInvesting via a product wrapper – FCA findings

FCA Findings:

• Advice being restricted to the wrapper and not investment as a whole

• Customer not experienced in non-mainstream propositions

• Many having very limited experience of standard investments

• Typically unregulated, high risk and highly illiquid investments.

• Unlikely to be suitable for the vast majority of retail customers.

• Poor standards of advice, research and due diligence


Regulatory MattersIndependent advice: Main additions to product range

The FCA reminds firms that they must conduct their business with :

integrity (Principle 1), due skill, care and diligence (Principle 2) and must pay due regard to the interests of their customers and treat them fairly (Principle 6).

Other conduct failings identified by the FCA

• Business models where all customers were treated as ‘insistent’ or seeking execution-only services.

• Number of firms adapting business model to advise customers to take out Small Self-Administered Schemes in an attempt to avoid FCA scrutiny.

• Advice to switch or transfer from pension arrangements is a regulated activity regardless of the funds’ destination!


Regulatory MattersAssessing the risk a customer is willing to take

Key issues

• Over reliance on risk profiling tools

• Poor / inconsistent descriptions of attitude to risk

• Failing to select suitable investments

• Inappropriate focus on risk only

• Responsibility when using tools


Regulatory MattersSuitability assessment and ‘know your customer’

• Risk profiler is good starting / discussion point

• Bankhall IRP tool includes suitability questions

• Further risk based KYC

• Carry information through to the suitability report


Regulatory MattersSuitability

Regulatory Publications

FCA• ‘Supervising Retail Investment Advice: Delivering Independent Advice’

(TR14/05) • Annual Risk Outlook paper and supporting Business Plan (April 2014)

FSA• ‘Establishing the risk the customer is willing and able to take, and making

a suitable investment selection’ (FG11-05 – March 11)• ‘Replacement business and centralised investment propositions’ (FG12-

16 – July 2012)

Bankhall guides also available:

www.bankhall.co.uk /Compliance and Technical / Advisory Guides

The Regulatory Landscape


Regulatory Matters ‘Regulatory landscape’

FCA ‘Connect’ system

• The FCA will be launching its new ‘Connect’ system from 1st October 2014

• ONA submissions and applications will change to Connect• Approved Persons applications• Appointed Representatives• Cancellations• Standing Data• Variation of Permissions

FCA stated that it will give firms time to submit any draft applications / notifications that they are working on in ONA until 1 December 2014.


Regulatory Matters ‘Regulatory landscape’

FCA’s Retirement Income Review

• February 2014 - the FCA announced probe into retirement income market

• 80% of consumers could secure greater income by shopping around

• Budget changes – wider review to look into value for money of retirement income products in the existing and new market landscape.

• Reported that FCA review of annuity sales practices now a standalone thematic review, on which it will report by the end of the year

• Mainly at provider level but could be wider implications


Regulatory Matters ‘Regulatory landscape

Business Risk Awareness Workshops

• FCA – continuing BRAW workshops and assessments

• CF, LD, LL, NP, SA, SY, GL, HR, CH, CW postcodes being assessed now

• BRAW Specific support available

• Onsite visit or remote appointment facility

Other FCA thematic reviews

• MMR post implementation review and testing - Autumn 2014

• FCA post RDR thematic review, 3rd Stage – mid July


Regulatory Matters ‘Hot Topics’ - 2014

Don’t forget… support is available from:

• Compliance Consultants

• CSU

• Regional Development Managers

• Bankhall Online

Questions?

Handset questions


Handset Questions

1. How satisfied are you with the information you have received during this afternoon’s event ?

• Very satisfied

• satisfied

• OK

• Unsatisfied

• Very unsatisfied


Handset Questions

2. How likely are you to attend future sessions similar to this afternoon’s event?

• Very likely

• Likely

• Don’t know

• Unlikely

• Very unlikely

that all regulated firms should be familiar with the main requirements of this Business the three cornerstones of Governance, Control and Culture; therefore the requirements of BRAW in general should not be a new concept. However, this level of contact with the regulator can be quite daunting for a small firm facility. These services are designed to provide our clients with focus, direction and peace of mind in the run up to BRAW and the following regulatory review

Thank you and questions

regulatory matters july/august event - 2014. compliance bulletin and regulatory analysis updates

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