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Financial services regulation and ethics

Financial services regulation and ethics


The new culture of regulation − the FCA settles in

Steve Williams

Now that it is up and running, the Financial Conduct Authority (FCA) has outlined its core aims for a new culture of regulation. Succinctly put, these are “that markets and financial systems are sound, stable and resilient, with clear pricing information that consumers can easily understand.”

On the FCA approach to regulation, Chief Executive, Martin Wheatley, has said that “the FCA has been given a very clear, uncomplicated remit by Government… our overarching strategic objective is to make markets work well Wheatley has been keen, in the short time since thenew regulator was launched, to describe a new culture of regulation under his stewardship:

“…a market that works well… [is] not a market where consumers never lose money − markets are about risk and in the appropriate product, consumers may gain or lose. It’s also not a market where firms never make money − the provision of services is rarely for free and firms have to be allowed to make a profit. So, a market that works well… [means] profits for good firms; exits for bad ones.”

The FCA appears to be focussing on the proper functioning of a market for financial services which responds to the needs of consumers. The FCA will push for greater price transparency and in this respect it is picking up where the FSA left off.

Following on from the RDR’s ban on commission payments for financial advisers, the FCA is banning rebate payments for fund platforms. Platforms will have to charge investors an up-front fee from April 2014. After all, if commission payments encouraged opacity and swelled the risk of biased advice, then rebates to platforms certainly magnify the risk of bias to certain product providers. According to an FCA press release, these rebates mean “it can be difficult for
investors to compare prices and products available on different platforms”. It is generally hard enough for professional advisers to compare prices and products on the different platforms
themselves as part of their due diligence procedures.

Under the new rules, with regards to due diligence a “firm must not use a platform service…unless it has satisfied itself that the platform… and its associates, only receive remuneration… permitted by the rules”. So IFAs have an important, perhaps difficult, role in the implementation of the rules. Those looking forward to a simpler landscape may be disappointed to hear that that we may see a proliferation of share classes. RDR-ready clean share classes will see the addition of multiple share classes as platforms negotiate discounts individually with each fund
management group.

The FCA is already very clear about the direction it is heading in. The focus will be much more on the consumer experience and less on tick-box rule-checking. “Good regulation should never be caricatured as a simple choice between consumer interest and business self-interest,” Wheatley believes, rather “it is, and always should be, in all our interests”.


FCA to exclude VCTs from UCIS promotion ban

Natalie Holt

The Financial Conduct Authority (FCA) is set to exclude venture capital trusts from plans to ban unregulated collective investment schemes from being marketed to ordinary retail investors.

In a written answer given to the House of Commons last week, Treasury economic secretary Sajid Javid said the regulator will set out its position on the proposed UCIS promotion ban next month. He said: “The FCA has announced it is minded to explicitly exclude VCTs from the restrictions on promotion proposed in consultation paper 12/19. The FCA is working toward making a final policy statement in June.”

The FSA first consulted on the banning the promotion of UCIS “and similar products” to most retail investors last August. Under the proposed rules, UCIS would only be marketed to sophisticated investors and high net worth individuals. Currently UCIS can be promoted to ordinary investors if an adviser deems the product is a suitable investment.

The Association of Investment Companies warned in September that the ban as proposed would cause “significant detriment to the VCT industry”, while Bestinvest has said the ban could wipe out as much as 75% of VCT fundraising.

In February the FSA said it was considering whether to amend the proposed ban on UCIS promotion to give firms more flexibility and to ensure products such as VCTs, exchange traded products, overseas investment companies and real estate investment trusts are not impacted.

Sajid Javid’s written answer did not address how other products besides VCTs will be treated under the UCIS ban. The FCA declined to comment on whether other products will also be out of scope, saying it will set out its position in next month’s policy statement. Earlier in May the FCA said it had delayed its UCIS policy statement, due in April, “to allow the time to get it right”.


Cheap and cheerful? The Seargeant Report results

John Housden

In the search for cheap basic products, HM Treasury seems to be going back over old ground. In autumn 2011, it launched an independent “Simple Financial Products Steering Group tasked with initiating a suite of Simple Financial Products that would help consumers navigate the financial marketplace”. This was chaired by Carol Sergeant, ex-Chief Risk Officer at Lloyds Banking Group.

Following an interim report in July 2012, a final report was published this March, with seven main recommendations:

1. The product names and supporting literature for the new Simple Financial Products should use “straightforward, standardised and consistent language”.
2. All Simple Financial Products should be covered by nine high-level principles, including areas such as product features and pricing transparency.
3. There should initially be four Simple Financial Products: an easy access savings account; a
30-day notice savings account; a regular savings account and “fixed term life insurance”.
4. A later phase will include a whole of life insurance product. Further “high priority” work should be undertaken on an income replacement product, to be sold on a non-advised basis.
5. Specific credit union products will be developed with the credit union movement.
6. The Simple Financial Product set should carry a Simple Financial Product “badge” to be developed.
7. The responsibility for the Simple Financial Product principles and the establishment of specific product standards and the accreditation process should be taken on by the British Standards Institution (BSI).

The initial focus will be on the first four products, with the Treasury running a progress review in March 2014.

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