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CPD: Financial services regulation and ethics

The latest edition of Newsbrief counts as 1 hour of structured CPD and covers the regulatory and marketplace changes that took place during August 2014. Visit the Money Marketing CPD Centre to answer 10 multiple choice questions and complete this CPD activity. Just click into your CPD Plan and you’ll find each month’s marketplace changes round-up in your activity list.

September CPD Newsbrief — Financial services regulation and ethics

Financial services regulation and ethics

FCA releases thematic reviews

Rachel Vahey

On 21 July 2014, the Financial Conduct Authority (FCA) published results of two thematic reviews.

The first, covering regulatory compliance of SIPP operators, followed on from the publishing of updated FCA guidance in October 2013 (FG13/8). It found that, despite previous warnings and guidance, a significant number of firms were still failing to manage certain risks. In particular, many firms didn’t have the necessary expertise to assess the risks that non-standard investments pose, and firms often failed to understand and identify the correct prudential rules that apply to their business. This, the FCA concluded, put UK consumers’ pension savings at considerable risk.

The FCA has taken the unusual step of writing to the CEOs of all SIPP firms to warn them of the failings uncovered, and asks them to take action to make sure their business operates within FCA rules. As a result of this review, the FCA has already limited business for some firms, and in some cases initiated enforcement investigations. And it intends to visit more firms over the next few months, and expects to see improvements in this area.

The second thematic review focused on the suitability of advice given on incentivised transfers out of defined-benefit (DB) schemes. After reviewing 300 cases, the FCA found that in a third of situations the advice given to customers wasn’t suitable.

Transfers out offer a clear advantage to employers, because they limit an employer’s ongoing and unknown financial liability under the scheme. But for individuals, it means giving up important guarantees, and may not be worthwhile, even if incentivised. The Pensions Regulator has made it clear that it considers an incentive-led transfer unlikely to be in a DB scheme member’s best interests.

The FCA will now work with individual financial advisory firms, and ask them to contact affected members and offer redress where appropriate.

Financial services regulation and ethics

FCA warns consumers of corporate bond fund risks

Fay Goddard

Investment in corporate bond funds has become increasingly attractive to consumers seeking income, particularly those wanting a low-risk investment with a rate of return higher than deposit accounts.

This demand has led to a competitive market with fund managers mostly succeeding in delivering the higher returns sought by investors. Many believe, however, that these returns may not be sustainable for much longer and that the risk profile of corporate bond funds has changed.

At the end of July, the FCA published a warning to consumers about the risks associated with corporate bond funds. They highlight three main areas of concern — liquidity, interest rate movements and company defaults.

The FCA is concerned that as the market for underlying bonds has shrunk in recent years and trading activity is low, it could be hard to sell holdings in corporate bond funds, resulting in consumers not being able to access their money quickly.

The second factor mentioned by the regulator is that an increase in interest rates is almost certain to affect corporate bond and fund unit prices. It is widely anticipated that there will be a rise in interest rates by the end of next year, which means bond prices are likely to fall.

The FCA’s final point relates to the risk of company defaults, which could affect the level of returns generated by the funds. While there is little evidence of defaults at present, the warning signs are there, with valuations on lower-rated corporate debt being quoted as beginning to “become stretched”.

Fund managers will naturally be looking at ways to mitigate these risks, including reducing exposure to high-yield and emerging market debt, but advisers would be wise to take a good look at the structure and underlying holdings of the funds recommended and to review the ongoing suitability of clients’ investments.

Financial services regulation and ethics

Guidance Guarantee proposal gets FCA paper

David Smith

The government has proposed a number of fundamental changes to retirement options for individuals with defined-contribution (DC) pensions. These include the provision of free impartial guidance to assist people in making the most of their pension savings, also referred to as the ‘Guidance Guarantee’.

The aim of the guidance is to help people to make informed decisions about their retirement benefits. The guidance will not include specific recommendations on products or providers, but will be sufficiently personalised to enable people to understand their retirement options.

The providers of the service (delivery partners) will discuss the options and provide key facts and information on the consequences of each option. It is not intended to replace financial advice, which the FCA expects many people will continue to take. Following the announcements, the FCA issued a consultation paper in July to consider:

  • Standards the FCA will set for delivery partners
  • Options for funding the cost of the guidance service
  • Additional requirements for firms following the introduction of the guidance service

Standards for delivery partners
The service providers will not be authorised. However, to encourage its use the FCA will introduce a separate principle-based standards regime to ensure proper conduct, and create consumer trust and confidence in the guidance and the delivery partners. The Treasury will be responsible for deciding which firms become delivery partners.

Options for funding the service
In order to fund the service, the government intends to collect a levy from firms it considers will benefit from providing the guidance. The FCA will collect the levy and has proposed three options for calculating it. All are based on the FCA ‘A’ Fee Block framework, which the FCA feels would avoid the need to alter existing systems and collect additional data from firms.

The three proposals are:

  1. Apportion the levy according to existing FCA funding requirements
  2. Split the levy equally across the fee blocks
  3. Apportion the fee across the fee blocks based on the products and services that clients are choosing

Small firms paying the FCA minimum annual fee of £1,000 will be exempted from the levy.

Requirements for firms
Firms will need to consider the most effective way of making clients aware of the guidance that is available, and how to make it free, impartial and available face to face. Using the service is not mandatory and there will be no limit on the number of times an individual can use it. If individuals have not requested a statement in the previous 12 months, delivery providers will be required to signpost the individual to the guidance service between four and six months before their retirement date, with a reminder six weeks before retirement.

Comments on the proposals are requested by 22 September, and the FCA plans to publish final standards and rules in a policy statement in late autumn.

September Newsbrief

The latest edition of Newsbrief counts as 1 hour of structured CPD and covers the regulatory and marketplace changes that took place during August 2014. Visit the Money Marketing CPD Centre to answer 10 multiple choice questions and complete this CPD activity.

Just click into your CPD Plan and you’ll find each month’s marketplace changes round-up in your activity list.

Not yet registered? Join for free today at and access more than 35 hours of independent, accredited CPD learning content. 

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