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Financial Services Regulation monthly update - June 2017

This month in summary

FCA publishes Consultation Paper on pension transfer advice

On 21 June 2017, the FCA published a Consultation Paper on its new proposals for advising on pension transfers where consumers have safeguarded benefits. This will primarily apply to transfers from defined benefit (DB) to defined contribution pension schemes.

The FCA hopes that its proposals will address the developments in the market and the increased demand for pension transfer advice. Since the introduction of the pension freedoms in April 2015, consumers now have more options available to access their pension savings. The values of transferring from a DB scheme are at an all-time high, which may be prompting more customers to transfer.

The new rules outline the FCA's expectations for advisers and pension transfer specialists to ensure that consumers receive advice which considers all relevant factors. More emphasis is placed on the overall assessment of the client's situation, objectives and options as a whole.

The proposals include:

  • replacing the current transfer value analysis requirement (TVA) with a comparison showing the value of the benefits being given up;
  • introducing a rule to require all advice in this area to be provided as a personal recommendation, which fully reflects the client’s circumstances and provides a recommended course of action;
  • removing the guidance for advisers to start from the presumption that a transfer will always be unsuitable - advisers will now be able to assess transfers on a neutral, case-by-case basis;
  • updating the guidance on assessing suitability when giving a personal recommendation to convert or transfer safeguarded benefits, so that advisers focus on whether a transaction is right for a particular individual; and
  • introducing guidance on the role of a pension transfer specialist.

The proposals outlined in this Consultation Paper do not represent a major overhaul of the FCA's policy; the emphasis is still on assessing customers' circumstances and options in order to provide suitable advice. However, certain changes will impact firms and the FCA is making a strong statement of its expectations regarding the assessment and advice process.

Firms involved in advising on pensions transfers, those acting as pension transfer specialists, pension providers, and those providing software for pensions transfer advice may wish to read and respond to the proposals of this paper. The consultation closes on 21 September 2017.

For more information, and a link to the FCA's website, please click here.

FCA publishes its final report into the asset management sector

On 28 June 2017, the FCA published the final findings of its asset management market study and announced the package of remedies it will take forward to address the concerns identified in its interim report into the sector.

This final report confirms the findings set out in the interim report published last year. Despite "sustained, high profits over a number of years" and a large numbers of firms operating in the market, the report concluded that price competition was found to be weak in a number of areas. The report also expressed concerns that there may be a lack of clarity given to investors as they were not always aware of the objectives of a fund, and some funds were not reporting their performance against an appropriate benchmark.

In response, Andrew Bailey, Chief Executive at the FCA, said "we have put together a comprehensive package of reforms that will make competition work better and help both retail and institutional investors to make their money work well for them."

Significant proposals from the FCA include:

  • strengthening the duty of fund managers to act in the best interests of investors (the Senior Managers Regime will be used to focus on individuals carrying out this duty);
  • requiring fund managers to appoint a minimum of two independent directors to their boards;
  • support the disclosure of a single, all-in-fee to investors to drive competition;
  • support consistent, standardised costs and charges disclosure to institutional investors; and
  • launching a market study into investment platforms.

Implementation of these, and other, proposals will take place in stages, with some being immediately taken forward. The FCA has issued two consultation papers in order to gather information for some of its other measures and plans on issuing more consultations as legislative initiatives, such as MiFID II, progress. Others will depend on the outcome of working groups and a full timetable can be found in the report.

These proposals will likely have a significant impact on much of the industry. The FCA has made it clear that it wants to oversee a much more customer-focussed market, with more clarity on the information provided to investors. Affected firms should look at the contents of this report to assess its impact on their business. Consideration should be given to how policies and procedures can be adapted to implement these changes, which could add to the pressure on firms already tackling other upcoming regulations.

For more information, and a link to the FCA's website, please click here.

FCA updates regulatory sandbox and announces second cohort of accepted forms

On 15 June 2017, the FCA provided an update on its regulatory sandbox and unveiled the list of firms that were successful in their applications to begin testing as part of the second cohort of the sandbox.

The regulatory sandbox is part of Project Innovate, the FCA's initiative to support innovative businesses by allowing them to test their products, services, business models and delivery mechanisms in a live environment while still ensuring that consumers are appropriately protected.

The FCA received 77 submissions for the second phase of the sandbox, an increase on the 69 that applied for the first phase. 24 firms made the current cohort and will begin testing soon. These tests will be conducted on a short-term and small-scale basis and the FCA has worked with the sandbox firms to agree testing parameters and consumer safeguards.

Accepted propositions from firms cover a range of ideas including distributed ledger technology based payment services and artificial intelligence software to observe client behaviour and better determine client preferences before financial advice is given.

Cohort one has now finished testing and firms are submitting their final reports, which the FCA will review before the firms transition out of the sandbox. The FCA states that the majority of tests have proceeded as planned towards meeting their objectives and it currently expects most firms to take their businesses forward to market.

The results of the FCA's work to support innovation in the financial services market will be of interest to many firms, both due to the broad question of whether this initiative can produce sustainable businesses and the potential for disruption that these incoming firms could cause.

Applications for cohort three are now open and firms wishing to test an innovative idea with the support of the Regulatory Sandbox should make their applications through the FCA's website.

For more information, and a link to the FCA's website, please click here.

Speeches and Communications

FCA investigations – the evolving approach

In a speech delivered on 15 June 2017, Jamie Symington, Director of Investigations at the FCA, outlined the FCA's evolving approach to investigations.

The speech highlighted the often held perception that "investigation is what the FCA does when a matter is in Enforcement" and that enforcement action will inevitably follow. The fear then becomes that the investigation process is simply the gathering of evidence to support FCA action.

Jamie Symington said he could understand why this perception has come about. The Financial Crisis of 2008 and subsequent scandal in the Libor and FX markets produced unprecedented turmoil in markets and uncovered widespread conduct issues. This resulted in a vast array of issues being dealt with by Enforcement, taking the FCA into new territory. A quick and robust response was needed to restore order, stability and confidence in markets; records for fines were broken again and again.

But things have now returned to relative stability and the FCA is seeking to move forward from this crisis response towards a more long term strategy for addressing conduct risk. It is therefore looking to change its approach. Central to this is the support of the FCA's priority to improve culture and governance in firms. This signals a greater focus on culture change, achieved through working with Supervision and a greater focus on individual conduct.

Jamie Symington said that the key point to make in this speech is that a matter is not passed to Enforcement only so that Enforcement can do its best to bring an enforcement case. Investigations should be understood as being opened so that the FCA can understand what happened.

The greater focus on change may signal a less adversarial approach and could mean that firms which make a genuine change to their conduct and culture might avoid disciplinary action. The speech states that "it is likely that proportionally fewer of our investigations will progress to disciplinary and enforcement action."

For the full speech, and link to the FCA's website, please click here.

Improving access to insurance

In speech delivered on 20 June 2017, Christopher Woolard, Executive Director of Strategy and Competition at the FCA, discussed the access issues affecting customers in the general insurance market, particularly regarding vulnerable customers.

Christopher Woolard highlighted the importance of being able to access financial services in order for people to fully participate in society. The FCA has seen consumers who previously had good access to services in the past finding that they have become marginalised in the current market.

The speech drew attention to the challenges facing the FCA in this area: to make sure that it and the industry share the same understanding of the issue, to make sure this issue is, and remains, firmly on the agenda for the industry, and begin to work out how to take action. Difficulties in navigating the market can lead to customers taking out unsuitable cover and problems understanding how insurers measure risk have led some to feel aggrieved.

The FCA's Occasional Paper on Vulnerability explained that financial services need to be able to adapt to consumers' changing circumstance, rather than being designed for the perfect consumer who never experiences difficulty.

The FCA has issued a Call for Input in order to better understand the issues facing vulnerable customers accessing different financial market, and whether more can be done to encourage innovation. The FCA sees this as an opportunity for the industry, regulator and consumer groups to work together to produce meaningful change for an extremely vulnerable section of the consumer population.

Firms operating in the insurance market may wish to read and respond to the Call for Input in order to help the regulator to understand the issues affecting vulnerable customers and the reasons for differences in pricing quotations.

The deadline for responses is 15 September 2017.

For the full speech, and a link to the FCA's website, please click here.

Fines and enforcements

SFO charges in Barclays Qatar capital raising case

On 20 June 2017 the Serious Fraud Office (SFO) charged Barclays Plc and four individuals with conspiracy to commit fraud and the provision of unlawful financial assistance contrary to the Companies Act 1985. This has led to a stay in the FCA's own investigations into this matter.

The charges relate to the bank's fundraising activities during the aftermath of the 2008 Financial Crisis, when it looked to raise capital from Qatari investors. Those deals meant that Barclays avoided a government bailout.

The four individuals are former employees of the bank: John Varley, former Chief Executive Officer, Roger Jenkins, Thomas Kalaris and Richard Boath. Barclays and the four individuals have been charged with conspiracy to commit fraud. The bank, John Varley and Roger Jenkins have also been charged with unlawful financial assistance.

The fraud charges relate to the way in which the bank disclosed "advisory service agreements". This involved making payments totalling £322 million to Qatari investors that the FCA said were not properly disclosed. It has been suggested that they may have been additional payments to secure fundraising support, rather than for advice. The second charge of unlawful financial assistance relates to a $3 billion loan Barclays made to Qatar which it is alleged was pumped back into the bank.

Barclays is currently "considering its position" on how it will respond to the charges.

This is a hugely significant charging decision from the SFO and sends a strong message that regulators are not afraid of targeting those at the very top of large institutions, perhaps leading to a renewed scrutiny of the actions of senior bankers.

For more information, and a link to the SFO's website, please click here.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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