June CPD Newsbrief — Financial services regulation and ethics
Unauthorised Budget guidance targeted by FCA
Cold calls from firms offering ‘free pension reviews’ have prompted an FCA warning to consumers.
Some firms are claiming to represent the government in its at-retirement guidance service announced in the Budget. The FCA has evidence that people are being contacted unexpectedly through phone calls, texts and text messages by unauthorised firms.
The firms offer a pension review and encourage consumers to move their pension to ‘get better returns’. The FCA says the reviews are designed to persuade consumers to move their pension to a self-invested personal pension or a small self-administered scheme.
The pension fund is often invested in unregulated investments such as overseas property developments, forestry or storage units known as store pods.
Tracey McDermott, the FCA’s director of enforcement and financial crime, had a clear message to the public. “People should be very wary if they are contacted out of the blue by someone offering a ‘free pension review’. Most of the companies offering this ‘service’ are not authorised by us, and we’re concerned that the reviews often end with pension pots placed in higher-risk, unregulated investments. If you see or receive offers of ‘free pension reviews’, just ignore them. If you are called out of the blue to discuss your pension, just hang up.”
Remuneration disclosure under IMD2
The Insurance Mediation Directive II (IMD2A) comes into force next year and will introduce an EU-wide regime for intermediaries involved in the promotion, sale and administration of certain general insurance products.
Back in 2002, the first IMD aimed to create an EU-wide market for insurance intermediaries by setting minimum regulation and consumer protection standards on insurance product selling. However, its provisions have not been applied consistently across the EU, and markets have splintered — partly because of the UK’s over-implementation of IMD. There is inconsistency across the EU in both the information provided to consumers and in consumer understanding of risks. Nor does IMD cover direct selling.
IMD2 is intended to create common standards for insurance sales and to improve consumer protection through increased provision of information and honest professional advice. The aim is also to ensure that EU consumers know the status of the person selling the product before any sale takes place. IMD2 will also introduce mandatory disclosure of commission or other remuneration by insurance intermediaries — including tied agents — and this will be implemented over a five-year period.
However, the EU Parliament has backed EU Commission proposals to exclude buyers of insurance for ‘large risks’ and a new category of ‘professional customers’. As the draft legislation stands, neither of these will be automatically entitled to disclosure of their intermediary’s remuneration, but they will benefit from other IMD2 provisions, such as an obligation on insurers to act honestly, fairly and in the best interests of customers — sound familiar?
Intermediaries will also be obliged to ensure that they know enough about a potential customer’s experience, financial situation and objectives to be able to assess whether the products they are selling are suitable. This will be required for ‘non-advised’ sales — expanding on the current use in the UK of the ‘statement of demands and needs’.
MMR’s impact on lending and property markets
The Mortgage Market Review (MMR) reforms finally made their way into the FCA Handbook at the end of April, following an almost unbearably long wait.
The majority of lenders, intermediaries and other organisations affected by the changes have been adapting their lending policies, selling practices, underwriting criteria and processing systems for more than a year − and training their staff accordingly. When 26 April 2014 finally arrived, it was almost business as usual. Other firms will have a lot more work to do.
The new regulatory requirements call for closer scrutiny of mortgage applications, more robust verification of the facts that mortgage applicants provide and a more common-sense approach to lending in respect of affordability throughout the period of the mortgage. The aim of the reforms is to foster and encourage responsible lending.
Mortgage interviews will take longer, as advisers gather information from applicants about their ‘committed expenditure’, ‘basic essential expenditure’. Overall, this will effectively limit the number of applications that can be processed.
There was a 62% year-on-year rise in purchase applications from February 2013 to February 2014, according to figures from the Mortgage Advice Bureau. The UK is still enjoying low interest rates, there are numerous assisted purchase schemes available and demand for property is on the increase.
However, year-on-year purchase applications from March 2013 to March 2014 showed an increase of just 51%, suggesting a slight cooling of the housing market’s growth ahead of the MMR taking effect. The longer mortgage turnaround times alone may take the heat out of the property market.
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