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Suitability changes bring confusion

The complexity of updating and integrating domestic and European rules on investments and advice was underscored last week with the publication of the FSA’s intentions on simplifying its rulebook on conducting investment business.

In essence, it could not either set out many concrete rules or simplify existing ones as too much remains uncertain.

In its policy statement on its flagship project of reforming the conduct of business rules (known as Newcob) regarding investment business, the FSA highlights more than once the areas it has had to delay decisions on in an effort to ensure its rules conform with EU directives such as Mifid. As such, Newcob rules do not come into force until that directive does, in November.

So sweeping are the implications of EU directives such as Mifid and the FSA’s own retail distribution review, the regulator has in effect delayed decisions on Newcob on some of the biggest-impact areas of investment business. These include well publicised subjects such as the definition of independence, the status of the payment menu and initial disclosure document and the issues surrounding basic advice but it also includes a revision of the suitability letters sent to clients.

Highlighting this partial rule change is what is being proposed with the industry staple of key feature documents. In its policy statement from last week, the FSA said it intends to carry on with its plans to simplify these documents, taking a less prescriptive approach in the type of information they contain as well as when they are sent out.

At the same time, the regulator has decided to scrap its idea to replace KFDs with a quick guide, after consumer testing showed little or no benefit to a changeover.

However, it is adding another element to KFDs, requiring a key facts logo to be used on these documents to make sure they stand out, although it has generously agreed to allow them to still be called key feature documents as changing the whole name to key facts would be too costly.

For Mifid and non-Mifid business, the FSA will require these new and improved KFDs or a simplified prospectus to be provided at the point of sale. However, this will apply only to non-Ucits funds. Ucits portfolios, under EU rules, must offer clients the simplified prospectus – the shape and look of which is still being debated at European level.

The complexity does not end there. Under the simplified prospectus, projected growth in the investment does not have to be displayed, whereas under a KFD it does.

This means that while a non-Ucits portfolio, like a lot of funds of funds, does not have to show projections, Ucits portfolios do and so do insurance-based products. This will make comparing like for like, in terms of product details, a little more difficult.

This is only one example of the partial, and confusing, rule changes taking place.

Under Newcob, the regulator’s intention is for suitability letters to become more streamlined, less prescriptive and will now be termed a report.

However, there is a difference in the treatment in what these reports contain, depending on what is being invested in – for instance, a unit trust versus an investment trust.

The FSA has postponed making a decision in this matter, alongside whether or not it will look to extend the suitability rules to professionals as well as retail clients.

Instead, it says it will publish the Newcob suitability report require-ments separately, although no timeframe is given and points out it will be issuing soon a Benefits of Regulation report commissioned from Oxera on the current suitability letter requirement.

The big-impact areas of intermediary and fund manager business have yet to be ironed out fully within the regulator’s new rules on conduct of business but it did make some inroads in some areas and outlined these in last week’s policy statement.

Fund managers will now get the best service and best price on shares bought through the brokers they deal with under the same best execution requirements that brokers have had to follow for years for retail customers.

Under the FSA’s rules, from November, best execution will now cover all levels of the share-purchase chain, including professionals who were once left out, although, in practice, due to the sums involved in fund manager deals with brokers, it was more than likely that they received “best” prices, even if it was not necessarily mandatory.

Many sections of Newcob, covering letters and report-ing requirements talk of using a durable medium in communication with clients.

On the surface, this could mean paper form, an area that the industry has been trying to move away from due to the costs in contacting clients this way, but these days it can mean a type of email or web service.

Durable medium can be a PDF sent via an email or a website with a log-in, so long as it is reproducible by the recipient in unchanged format.

The dreaded RU64 is to be maintained and subsumed into the proper conduct of business rules.

The FSA is going ahead with its proposals to remove the requirement to provide a post-sale cancellation reminder notice.

At the moment, additional key feature documents for life policies must be sent after point of sale. The FSA is now looking to remove that requirement.


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