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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 April 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.

May CPD Newsbrief — Financial services regulation and ethics

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FCA’s ‘zombie fund’ announcement lacked brains

Charlotte Mannouris

The FCA may soon be under investigation into potential market abuse, following its bungled disclosure of a market-sensitive review of the insurance sector.

Three days before the FCA annual review was due to be released, a senior FCA director revealed the FCA’s plans to review ‘zombie funds’ — looking into the possible mistreatment of customers and extortionate exit charges. However, the FCA failed to clarify the scope of its planned inquiry until six hours after trading opened, by which time fears of a regulatory crackdown and punishing fines had wiped £billions off the value of insurers.

A ‘zombie’ or ‘closed’ fund is a with-profits fund that no longer accepts new business; it runs off its portfolio of insurance liabilities until the final policy matures. In contrast with an open fund, which is continually receiving new funds that provide liquidity, a closed fund has no new money coming in, so a greater proportion of its assets need to be retained in fixed interest securities in order to fund claims and withdrawals. Furthermore, investors are often trapped by penalty charges of between 10 and 12 per cent plus a market value adjuster and, because such funds are closed to new business, there is no incentive to deal generously with existing policies that are maturing now in order to appear attractive to new policyholders.

Many closed funds eventually merge with other life insurance funds, or are transferred to another company in order to achieve economies of scale. However, the FCA is concerned that insurers may be exploiting loyal policyholders by using returns from the zombie funds to cover costs that relate to other parts of their businesses.

Large institutional investors are looking into the possibility of pursing the regulator to have their losses ‘made good’, having identified three potential allegations of market abuse: selective disclosure of information; spreading of misleading information and delaying in correcting the false market.

An independent law firm will assess the way the FCA communicated its message and whether it has procedures in place to control the release of price-sensitive information.

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FCA’s new Risk Outlook and Business Plan released

Fay Goddard

The FCA published its annual Risk Outlook and Business Plan for 2014/15 on 31 March. The Risk Outlook sets out the FCA’s approach to assessing risks to its objectives and the Business Plan sets out the activities that the FCA intends to carry out in 2014/15 to meet its objectives, i.e. to protect consumers, enhance market integrity and promote competition.

As the UK emerges from a lengthy recession, the FCA has updated its views to reflect the very different operational environment. There is a clear focus on the need for firms to embed cultural change and the FCA wants to ensure that the opportunities presented by the changes in the economic environment do not impact adversely on consumers.

Thanks to the FCA assuming regulatory responsibility for the consumer credit market from 1 April 2014, it is not surprising that there is a considerable amount of attention given to debt and the impact of a rise in interest rates.

The FCA has identified the following seven forward-looking areas of focus:

  1. Technology may outstrip firms’ investment, consumer capabilities and regulatory response
  2. Poor culture and controls continue to threaten market integrity
  3. Large back books may lead firms to act against their existing customers’ best interests
  4. Retirement income products and distribution may deliver poor consumer outcomes
  5. The growth of consumer credit may lead to unaffordable debts
  6. Terms and conditions may be excessively complex
  7. House price growth that is substantial and rapid may give rise to conduct issues

The FCA’s Business Plan details the current and planned thematic work and market studies over the next twelve months. The Long Term Savings & Pensions category is most relevant to financial planners.

For those in the mortgage market, there is considerable focus on consumer lending but mortgage intermediaries would benefit from taking a look at this section.

In summary, firms would be wise to consider the FCA’s paper and to assess how the FSA’s work may affect their current business model.

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Independence Day

Charlotte Mannouris

The FCA has published new guidance on independence following feedback from firms that they need further clarification of the rules.

Since RDR, many banks have stopped providing advice, leading to an increase in new enquiries for advice firms. However, it is thought that those looking for a new adviser are more inclined to opt for a firm that offers ‘unbiased’ advice than one that has to describe its services as ‘restricted’.

The word ‘restricted’ has negative connotations, and an inexperienced or uninformed client could be forgiven for interpreting the word ‘restricted’ as meaning ‘inferior’. There are firms who referred to themselves as independent pre-RDR but are unsure whether they are meeting the post-RDR criteria to continue to do — hence the request for clarification.

The FCA’s latest guidance follows a review of 113 firms, and those that failed to meet the rule on independence did so due to issues relating to:

  • the use of platforms
  • referrals to specialists
  • not considering all investment products
  • networks failing to ensure all of their ARs adhere to the independence rules

The new guidance includes some examples of good and bad practice. For example, a firm uses a panel, which contains a wide range of products from pre-approved providers, and that has been constructed by reviewing the whole market. The panel is used for the majority of recommendations but advisers also have the ability to recommend ‘off-panel’ solutions, which are subject to pre-sale checks and minimum research and due diligence standards. This is an example of good practice. An example of bad practice cited in the guidance, is adopting a single platform and not considering off-platform investments or other platforms.

The FCA hope that the guidance will clear up any confusion over the rules, but it appears that the regulator has missed the point. The request for clarification has been met with more vague statements and over-simple examples.

A ‘rough guide’ approach may have been OK under principles-based regulation, where the ‘guidance’ served a purpose, but the issue of independence, or not, is fundamental to firm’s existence. Advisers therefore need — and want — the opportunity to challenge specific details.

May Newsbrief

The latest edition of Newsbrief counts as 1 hour of structured CPD and covers the regulatory and marketplace changes that took place during April 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. 

Learning objectives (full list of ApEx standards covered below)



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