Teal blue graphic

Financial Services Regulation monthly update - November 2016

This month in summary

Financial services regulation

Speeches and communications


Financial Services and Regulation

Say goodbye to early exit pension charges

In recent years, the government has turned its attention to reforming the UK retirement market, which has included implementing certain 'pension freedoms' to change how consumers can access their pension savings at normal minimum pension age. These reforms also included placing a duty on the FCA to cap early exit pension charges after amendments were made to the Financial Services and Markets Act 2000.

The FCA began executing these reforms in May 2016 when it published its consultation paper on the matter. This month the regulator issued its feedback statement and follow-up rules on how it proposes to move forward with its proposals.

In summary, with effect from 31 March 2017, early exit charges:

  • will be capped at 1% of the value of a member's benefits being taken, converted or transferred from a scheme;
  • cannot be increased in existing schemes that currently have early exit charges set at less than 1% of the member's benefits under a scheme; and
  • are prohibited in schemes entered into after the proposed new rules come into force.

Despite responses to the consultation paper raising operational concerns relating to the implementation of the cap and certain issues with the FCA's methodology, the FCA has stuck with its original proposals, as it claims that a proportionate balance is struck between the benefits and costs to firms of applying the cap going forward.

In light of the above, firms should now be:

  • reviewing their internal processes in order to implement the correct cap for new and existing schemes by 31 March 2017; and
  • ensuring that customers are notified of these changes in the correct manner prior to implementation.

The FCA's feedback statement and final rules can be viewed in full here.

Lifetime ISA – Customers must be warned

On 16 November 2016, the FCA outlined its proposed approach to regulating the promotion and distribution of the Lifetime ISA (LISA).

The introduction of the LISA was announced in the 2016 budget and the government has suggested that it will be available from April 2017. The product allows people under the age of 40 to save or invest flexibly to either provide a deposit for a first home or save for retirement.

Investors who open a LISA will be able to:

  • pay in up to £4,000 each tax year up to age of 50 and receive a 25% government bonus on that contribution each year;   
  • use the funds to help buy a first home worth up to £450,000 at any time from 12 months after first saving into the account; and
  • withdraw the funds at any time to purchase a first home or in case of terminal illness, or after the age of 60. Investors will lose 25% of any money they withdraw before age 60 for any other purpose (called the early withdrawal charge).

Overall, the LISA is going to be regulated in the same way as other ISA products, with some additional protections in place to reflect its dual purpose.

Firms are going to be required to give specific risk warnings at the point of sale, which include reminding customers of the early withdrawal charge, the importance of ensuring an appropriate mix of assets is held in the LISA and any other charges that they may accrue on the account. The FCA has also proposed that providers will have to offer a 30 day cancellation period after selling the LISA. These warnings are important to make it clear to employees that there are risks involved in making use of the LISA and that most employees will be better protected by their workplace pensions.

Any firms looking to offer a LISA to customers should review the FCA's consultation paper and think about how the proposed approach may impact their internal processes going forward. Firms should look at embedding these steps now to ensure that they are prepared for potentially offering a LISA to customers in April 2017.

Responses to the consultation paper are required by 25 January 2017.

The FCA's consultation paper can be viewed in full here.

Authorisation and supervision of Insurance Special Purpose Vehicles

On 23 November 2016, the FCA announced that it is jointly consulting with the PRA on the proposed approach to authorisation and supervision of insurance special purpose vehicles (ISPVs), which will facilitate insurance linked securities (ILS) business.

HM Treasury is introducing a new framework for ILS business which is intended to take effect from Spring 2017. The FCA and PRA then expect to be able to accept applications for authorisation of ISPVs once the new framework has been implemented. This will result in the creation of a new regulated activity of insurance risk transformation for which ISPVs will need to apply, and there will also be new authorisation forms, on which the PRA is consulting.

ISPVs will still apply to the PRA for authorisation being dual-regulated activities and the FCA will continue to decide whether to approve that authorisation. The FCA has suggested that applications would be determined in a 6-8 week window providing the proposal is straight-forward and there is a reasonable level of engagement with the regulators.

Firms must respond to the above consultation paper by 23 February 2017.

The FCA update, along with a link to the consultation paper can be found here.

Shopping around for an annuity

Annuity firms will have to inform their customers how much they could gain from shopping around and switching provider before they buy an annuity under new rules proposed by the FCA in its consultation paper published on 26 November 2016.

From September 2017, firms will be required to provide:

  • information in a personalised form in a format set out by the FCA, which shows consumers the difference between the provider's own quote and the highest quote available to the consumers from all other providers on the open market; and
  • a prompt to help the customers access the best quote, which will appear as a link.

They will also need to provide the following further information set out by the FCA:

  • the net annuity purchase amount (the pension fund that will be used to purchase the proposed annuity) used to purchase the proposed annuity;
  • whether the annuity is single life or joint life;
  • whether payment is in advance or in arrears of the start date;
  • whether the rate of income paid by the annuity is guaranteed for any period;
  • whether the annuity income paid will increase in line with inflation or some other specified rate;
  • the provider's own quote; and
  • how to shop around (i.e. the phone number and URL for the Money Advice Service).

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, stated that the FCA has recognised that whilst sales have declined since the new pension freedoms were introduced, "annuities still play a significant role in retirement provisions for consumers". As such, the FCA is pushing transparency and competition in this area going forward and has also announced that it is to introduce requirements on the providers of retirement income products relating to the types and volumes of the products they are selling.

Firms should therefore review these proposals and assess the potential impact it could have on their business going forward, as the FCA proposes to apply these rules to firms from 1 September 2017.

Firms must respond to this paper by 24 February 2017.

The above consultation paper can be found here.

Speeches and communications

The fight against financial crime

Fighting financial crime is one of the FCA's priority themes set out in its 2016/17 Business Plan. It has been a key development area for the FCA over the last few months and will continue to be so throughout 2017. Technological developments have fundamentally changed the landscape of the financial sector in the last 10 years and have led to many benefits to the market. However, such a vast change is bound to leave open a risk to an increase in financial crime. At the FCA Financial Crime Conference this month, firms were provided with an insight into the risks and development areas that the FCA will be focusing on in 2017, which we have summarised below.

In his opening speech, Andrew Bailey, Chief Executive of the FCA, recognised that financial crime is 'constantly evolving' and there is increased scope, both domestically and internationally, for financial crime to take place. Rob Gruppetta, Head of the Financial Crime Department at the FCA, valued this concern but also raised a different viewpoint. He confirmed that anti-money laundering (AML) measures across the UK cost billions of pounds a year and the FCA recognises that much of these costs result from burdens and inconveniences on law-abiding companies that will "ultimately be borne by customers". The need for balance and proportionality was emphasised throughout and Mr Gruppetta explained that there are key areas for reform that the FCA intends to explore with the Government to rectify this. These are:

  • whether some aspects of transaction monitoring can be centralised;
  • whether the criminal liability attached to the Money Laundering Reporting Officer role results in defensive reporting; and
  • whether slightly relaxing the reliance provisions in the Money Laundering Regulations would reduce firms' reluctance to share customer due diligence information.

Mr Gruppetta highlighted that in order to monitor how firms are handling financial crime, the FCA will soon begin inspecting a random sample of firms (including financial advisors, stock brokers, safe deposit box providers and life insurers), which it expects will involve reviewing roughly 100 firms each year. The FCA has also introduced a new financial crime data return that all but the smallest regulated firms for AML purposes will need to complete from the end of this year, which is intended to expose risk areas for the FCA to focus its supervision accurately.

Nausicaa Delfas, Director of Specialist Supervision for the FCA, stated that both Financial Crime and Innovation and Technology are two of the FCA's priorities for this year and next. She recognised that these two themes do not always go "hand in hand", as matters such as AML regulation can appear to "stifle innovation". The FCA is conscious that some AML practices have not evolved much over time and firms are encouraged to develop ways to monitor customer transactions more efficiently in order to reduce burdens and costs going forward.

The FCA also highlighted that the government will be preparing new Money Laundering Regulations soon and the FCA will be updating its publication "Financial Crime: a guide for firms'" in the next year as a response to the changes. Firms should be keeping their eyes open for these changes in the New Year to take advantage of any opportunities to provide their input to the regulator. The FCA is welcoming views on how to move forward and is encouraging firms to "get involved when the time comes" to help the FCA achieve its goals.

The  speeches can be viewed via the below links:

Weak price competition in the asset management sector

The UK's asset management industry manages nearly £7 trillion of institutional and individual assets and over three quarters of UK households with occupation or personal pensions use the services asset managers offer.

However, the FCA has revealed in its interim report that it found weak competition in a number of areas in the asset management sector and as such, has proposed a significant package of remedies to generate more competition, and protect those least able to actively engage with their asset manager.

The FCA's interim report reveals that:

  • there is limited price competition for actively managed funds, meaning that investors often pay high charges. On average, these costs are not justified by higher returns;
  • there is stronger competition on price for passively managed funds, though the FCA did find some examples of poor value for money in this segment;
  • fund objectives are not always clear, and performance is not always reported against an appropriate benchmark;
  • despite a large number of firms operating in the market, the asset management sector as a whole has enjoyed sustained, high profits over a number of years with significant price clustering; and
  • investment consultants undertake valuable due diligence for pension funds but are not effective at identifying outperforming fund managers. There are also conflicts of interest in the investment consulting business model which require further scrutiny.

In light of these issues, the FCA has proposed a package of remedies, which include:

  • a strengthened duty on asset managers to act in the best interests of investors, including reforms to hold asset managers to account for how they deliver value for money;
  • introducing an all-in fee so that investors in funds can easily see what is being taken from the fund;
  • a number of measures aimed at helping retail investors identify which fund is right for them, such as requiring asset managers to be clear about the objectives of the fund, clarifying and strengthening the use of benchmarks and providing tools for investors to identify persistent underperformance;
  • making it easier for retail investors to move into better value share classes;
  • requiring clearer communication of fund charges and their impact at the point of sale and in ongoing communication to retail investors;
  • requiring increased transparency and standardisation of costs and charges information for institutional investors;
  • exploring the potential benefits of greater pooling of pension scheme assets; and
  • requiring greater and clearer disclosure of fiduciary management fees and performance.

This is yet another area where the FCA is calling for further transparency. Andrew Bailey, Chief Executive at the FCA, has stated that the FCA "want asset managers to ensure investors receive value for money through pursuing energetically their duty to act in their customers' best interests" and these remedies are intended to achieve that outcome.

In light of the above, asset managers should ensure that they are aware of the importance of transparency for customers going forward. Firms should review their priorities for 2017 to put clarity for the customer at the top of the list and asset managers as individuals should recognise the impact that regulation may have on their day-to-day duties to the customer.

The FCA's interim report can be viewed in full here.

The FCA calls for input on high-cost credit and overdrafts

On the 29 November 2016, the FCA issued a call for input to assist with further work on high-cost credit, including a review of the high-cost short-term credit (HCSTC) price cap.

This publication demonstrates the FCA's continued focus on products that it believes pose the highest risk to its consumer protection objective since taking over regulation of consumer credit in April 2014. The FCA has committed to reviewing the HCSTC price cap but has now decided to expand this work to look at high-cost products holistically to build a picture of how they are used and whether they cause detriment to consumers. 

Whilst the FCA has already taken many steps to address the risk of consumer harm in this area, this spark of further attention results from stakeholder feedback to the Competition and Markets Authority's (CMA) Retail Banking Market Investigation, which highlighted issues such as inappropriate use of longer-term borrowing, poor price transparency and the nature and level of charges, particularly for unarranged overdrafts.

The FCA needs to collect more data and other evidence to assess the extent, nature and causes of consumer detriment. This will inform its decision as to whether further policy interventions are needed in the following areas:

  • High-cost products – The FCA will look across all high-cost products to build a full picture of how these are used, whether they cause detriment and, if so, to which consumers.
  • Overdrafts – The CMA identified a number of competition issues with overdrafts (which are referenced above) and will look in more detail at overdrafts from a consumer protection, as well as a competition, perspective using its full range of powers.
  • The HCSTC price cap – The FCA is now approaching the two year review of the price cap that was promised after it came into force on 2 January 2015. The FCA will assess whether there is evidence that suggests that the cap should be changed. The FCA is also keen to see if there is any evidence of consumers turning to illegal money lenders directly as a result of being excluded from high cost credit because of the price cap. The FCA expects to publish its findings on the review of the payday cap next summer.
  • Repeat and multiple HCSTC borrowing – The FCA will continue to monitor the impact that repeat and multiple borrowing has on the market and consumers.

Firms should review the FCA's call for input and ensure that any comments are provided to the FCA by 15 February 2017.

The Call for Input can be viewed in full here.


Investors lose £4.3 million in unauthorised collective investment scheme

On 1 November 2016, the FCA announced that Scott Crawley, Daniel Forsyth, Adam Hawkins, Ross Peters, Aaron Petrou and Dale Walker have been prohibited from performing any function in relation to any regulated activity due to their involvement in the operation of an unauthorised collective investment scheme. This scheme operated through three companies, namely Plott Investments Ltd (which changed its name to Plott UK Ltd), European Property Investments (UK) Ltd and Stirling Alexander Ltd.

The scheme resulted in over 100 investors losing just under £4.3 million and the individuals have received sentences totaling more than 30 years. The individuals were found guilty of:

  • breaching, or aiding and abetting the breach of, the general prohibition (the carrying on or purported carrying on of a regulated activity without authorisation or exemption);
  • possessing criminal property;
  • conspiracy to defraud; and
  • providing information knowing it to be false or misleading.

Please find further FCA comment on the above here.

Mark Lyttleton pleads guilty to insider dealing

Mark Lyttleton, a former Equity Portfolio Manager at BlackRock, pleaded guilty to two counts of insider dealing on 2 November 2016. Mr Lyttleton was able to discover and act on inside information either by working on deals concerning the relevant stocks or being party to conversations conducted by colleagues. He was able to use the inside information to inform his purchase of shares a short time before any public announcement was made. This trading was conducted by Mr Lyttleton through an overseas asset manager trading on behalf of a Panamanian registered company.

Mr Lyttleton will be sentenced on 21 December 2016.

Please find further FCA comment on the above here.

Two plead guilty to insider dealing

The FCA has stated that it is "determined to do whatever is required to curb insider dealing and other market abuse to protect the public and market integrity".

This statement was issued following Manjeet Mohal, a trusted member of the management reporting team at Logica Plc (Logica), pleading guilty to two counts of illegal disclosure of inside information that he had obtained in relation to takeover negotiations between CGI and Logica on 30 November 2016.

Mr Birk, who was a neighbour of Mr Mohal, also pleaded to one count of insider dealing, as he admitted that he used the inside information to purchase shares and options in Logica two days before the public announcement of the takeover. He made in excess of £100,000 profit as a result of that information.

Please find further FCA comment on the above here.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Insights & events View all