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Regulation Matters brochure June 2019

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Regulation Matters June 2019 Welcome to this edition of Regulation Matters covering regulatory updates which impact financial advisers. If you have any questions about any of the subject matters and would like further information on the additional service available to support directly authorised firms, please contact 0800 085 0825 .

Regulation Matters is produced by TenetSelect as guidance only and is based on their interpretation, it is not and should not be relied upon as professional or legal advice. TenetSelect does not accept any liability for any losses arising directly or indirectly in connection with any of the information contained within Regulations Matters to the extent it can be excluded by law.

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IN THIS ISSUE

Who is it relevant to? Summary

Action recommended / for your information?

Subject

LF WOODFORD EQUITY INCOME FUND – SUSPENSION IN DEALING FCA REGULATION OF PRE-PAID FUNERAL PLANS

Firms conducting investment business Firms that recommend – or make introductions to - pre-paid funeral plan providers Firms with clients who transferred benefits from the British Steel Pension Scheme

FCA update on developments

For your information

HM treasury consultation on bringing the sale and operation of all pre-paid funeral plans within the FCA’s remit

For your information

TRANSFERS FROM THE BRITISH STEEL PENSION SCHEME

The FCA and FOS are hosting a series of events for anyone who is concerned about the advice they received when transferring out of the British Steel scheme.

For your information

ASSESSING THE ADEQUACY OF YOUR FIRM’S FINANCIAL RESOURCES

Directly Authorised Firms

The FCA has issued a consultation paper, clarifying its approach to assessing whether a firm has adequate financial resources and setting out what it expects firms to do when carrying out their own assessments

For your information

REMINDER OF KEY REGULATION MATTERS

All firms

For your information

Actions recommended in last month’s issue of Regulation Matters.

REGULATORY MATTERS ON THE HORIZON

All firms

Overview of FCA planned activity.

For your information

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LF Woodford Equity Income Fund – Suspension in dealing AT A GLANCE The FCA has issued an update: • Explaining that funds suspend dealings when the operator decides that it is necessary in order to protect investors; • Clarifying the extent of the FCA’s involvement in those decisions; and • Responding to commentary relating to the listing of some of the Fund’s assets on the International Stock Exchange in Guernsey. Link to the FCA update: https://www.fca.org.uk/news/statements/update-lf-woodford-equity-income-fund FCA regulation of pre-paid funeral plans AT A GLANCE The Government proposes to: • Amend the Regulated Activities Order so that both the sale and operation of all pre-paid funeral plans will be regulated by the FCA; • Require plan providers who wish to continue to manage funeral plans to become FCA authorised before the FCA’s remit is expanded; • Require intermediaries such as comparison websites, call centres and funeral directors to become authorised or to become ARs of an authorised firm (expected to be a plan provider in many cases) if they wish to continue in the market; • Give access to FOS in respect of complaints relating to acts/omissions of authorised providers and intermediaries that occur after the introduction of the new regulatory regime; and • Give access to FOS in respect of complaints against providers that are/were members of the current voluntary regulator (The Funeral Planning Authority), even where the acts/omissions that give rise to the complaint occur prior to the introduction of the new regime. Implementation timescale: 18 months from the date when the amending legislation is made.

Want to know more? CLICK HERE (or turn to page 7) for a more detailed summary, including recommended actions.

DO YOU NEED FURTHER HELP OR SUPPORT? If you have concerns about being compliant, get in touch with TenetSelect, the directly authorised regulatory experts, by calling 0800 085 0825. We have a wide range of services to help your firm, and we would love to have a chat to tell you more. Regulation Matters is produced by TenetSelect as guidance only and is based on their interpretation, it is not and should not be relied upon as professional or legal advice. TenetSelect does not accept any liability for any losses arising directly or indirectly in connection with any of the information contained within Regulations Matters to the extent it can be excluded by law.

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Assessing Adequate Financial Resources AT A GLANCE In this Consultation Paper, the FCA explains that the FSCS paid out £846m in the last five years in respect of claims made against ‘solo regulated’ firms (broadly, regulated firms other than banks and insurers) who were unable to meet the claims made against them. The FCA points out that this inability of some firms to meet their liabilities to consumers is unfair on consumers and surviving firms because the cost of meeting FSCS payouts is an unnecessary burden on them. The FCA doesn’t propose to change the general level of financial resources required by its rules. Instead, in this paper, the FCA sets out to provide more clarity to firms on: • How having adequate financial resources helps to minimise the risk of a firm’s failure causing harm; • What a firm should do when assessing whether it has adequate financial resources; and • How the FCA assesses the adequacy of a firm’s financial resources. The FCA consultation paper can be found here: https://www.fca.org.uk/publication/consultation/cp19-20.pdf

Want to know more? CLICK HERE (or turn to page 8) for a more detailed summary, including recommended actions.

Transfers from the British Steel Pension Scheme AT A GLANCE

The FCA held two events in June for anyone concerned about advice they received on transferring from the British Steel Pension Scheme. The events were also attended by the FOS and the Pensions regulator. Attendees were given information on what their adviser should have done when giving them advice in order to help them decide whether they wish to make a complaint about that advice. The FCA’s announcements can be found here: https://www.fca.org.uk/news/press-releases/fca-host-events-british-steel-pension-scheme-members https://www.fca.org.uk/news/news-stories/fca-confirms-next-event-british-steel-pension-scheme-members Further events are planned for later in the year. Firms will need to ensure that records relating to transfers from the British Steel Pension Scheme are complete and robust.

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Reminder of key regulatory matters Below is a useful reminder of key regulatory matters affecting financial adviser firms including actions recommended in last month’s issue of Regulation Matters (issue 142).

Subject

Recommended Action

Further Information

SM&CR

https://www.fca.org.uk/firms/ senior-managers-certification- regime/solo-regulated-firms https://www.fca.org.uk/ publications/consultation-papers/ cp19-17-mortgage-advice-and- selling-standards https://www.fca.org.uk/ publication/market-studies/5- conduct-questions-industry- feedback-2018-19.pdf https://www.fca.org.uk/publications/ multi-firm-reviews/review-principal- firms-investment-management- sector

Download the FCA’s guidance and consider what action your firm needs to take.

Mortgage Advice & Selling Standards – CP19/17

Review the FCA Consultation Paper and consider the impact of the proposals.

FCA ‘Five Conduct Questions’

Consider the FCA’s Feedback report in the context of the implementation of SM&CR

Appointed Representatives – Principal Responsibilities

If your firm has ARs, read the FCA’s review to ensure that you are meeting your responsibilities.

CLICK HERE to return to page 2.

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It’s an ever-changing market with a constant stream of new and updated regulation for financial advisers to worry about. We have provided a brief overview of the FCA’s planned activity as we currently understand it, but please be aware that the FCA does sometimes change the timing. Rest assured, as part of our service we will keep you informed and provide guidance to help you remain compliant. Regulatory Matters on the Horizon

Subject

Publication Type Policy statement and final rules Policy statement and final rules Policy statement and final rules Policy statement and final rules Potential consultation and proposed rules Policy statement

Expected Date

Intended Audience

Feedback on Investment Platforms Market Study Remedies Retirement Outcomes Review: Policy statement to CP19/5 FCA regulated fees and levies

Q4 2019 Firms that

distribute retail investment products.

July 2019 All investment firms involved in income drawdown.

July 2019 All firms.

Retirement Outcomes Review

July 2019 Firms operating in the pensions market.

Contingent Charging – DB transfers

Summer 2019

Firms operating in the pension transfers market.

Mortgage Advice & Selling Standards – Policy Statement to CP19/17

Q4 2019 Firms operating in the mortgage market.

CLICK HERE to return to page 2.

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FCA regulation of pre-paid funeral plans

The Government has concluded that the size of the market and the potential for consumer harm are now such that it is necessary for the sale and operation of all pre-paid funeral plans to be subject to statutory regulation. The issues identified by the Government include: n Reports of high pressure, misleading sales tactics; n A lack of transparency at comparison sites and other intermediaries; n Conflicts of interest arising from the remuneration of intermediaries; n Potentially inadequate standards of governance and transparency in trust-based arrangements; and n Reports of consumers not fully understanding the limitations of the arrangements they enter into. The Government has concluded that the FCA is the most appropriate body to regulate these arrangements because: a. The products operate similarly to insurance policies in that a consumer makes one or more payments and they trust that the provider will meet certain costs when they die; and b. Existing secondary legislation can be amended relatively quickly whereas a new regulator would require an Act of Parliament. Currently, the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (‘RAO’), which sets out those activities that are regulated by the FCA, includes the activity of entering into a funeral plan contract as a provider among the list of regulated activities. However, to date all providers in the market have structured their plans so that they benefit from an exemption in Article 60 of the RAO. The exemption applies where the funeral plan is underpinned by a whole of life policy on the life of the plan holder or where the sums paid by the plan holder are placed in a trust meeting certain conditions.

The Government proposes to: n Amend the RAO so that both the sale and operation of all pre-paid funeral plans will be regulated by the FCA; n Require plan providers who wish to continue to manage funeral plans – even existing plans - to become FCA authorised before the FCA’s remit is expanded (expected to be in approximately 18 months); n Require intermediaries such as comparison sites, call centres and funeral directors to become authorised or to become ARs of an authorised firm (expected to be a plan provider in many cases) if they wish to continue in the market; n Give access to FOS in respect of complaints relating to acts/omissions of authorised providers/intermediaries that occur after the introduction of the new regulatory regime; and n Give access to FOS in respect of complaints against providers that are/were members of the current voluntary regulator (The Funeral Planning Authority) even where the acts/omissions that give rise to the complaint occur prior to the introduction of the new regime. The FCA will consult on rules and it will also consult on whether the FSCS should cover pre-paid funeral plan providers/intermediaries. Firms should have approximately 12 months to familiarise themselves with the new regime before the new rules come into effect.

CLICK HERE to return to page 3.

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Assessing Adequate Financial Resources

THE CONSEQUENCES OF INADEQUATE RISK AND FINANCIAL MANAGEMENT BY FIRMS The FCA highlights that the FSCS paid out £846m in five years from 2013 to 2017 in respect of claims made against solo-regulated firms that were unable to meet the claims made against them. The FCA points out that this inability of some firms to meet their liabilities to consumers is unfair on consumers and on surviving firms because the cost of meeting FSCS payouts is an unnecessary burden on them. THE ROLE OF THE FCA In this Consultation Paper, the FCA acknowledges that, when markets and competition are working well, it is inevitable that some firms will fail. Therefore, the FCA has two aims when supervising firms: n To enforce rules that deter poor financial management or imprudence; and n To ensure that failures are as orderly as possible. It aims to achieve this by ensuring firms have adequate financial resources and credible wind-down plans. The FCA’s resources are limited so its approach to prudential supervision is risk-based and it sets out to be proportionate. The FCA doesn’t propose to change the general level of financial resources required by its rules. Instead, in this paper, the FCA aims to provide more clarity to firms on why they should assess whether their financial resources are adequate and what they should consider when carrying out those assessments. The FCA will sometimes ask a firm to submit its own assessment of its financial resources for review. When that happens, the main points that the FCA review covers are: n Is there an adequate risk management framework, including a clear risk appetite? n Has the firm appropriately and adequately identified the risks to which it is exposed? n How material is each risk? n How adequate are the firm’s systems and controls? n Has the firm made adequate use of stress-testing? n Is the risk assessment process used in decision- making? n Does the firm have adequate financial resources based on the risks it is exposed to?

The FCA has issued a consultation paper (CP19/20) entitled: Our Framework: Assessing Adequate Financial Resources. In this paper, the FCA aims to provide more clarity to firms on: n The role of assessing adequate financial resources; n What the FCA looks for when it is assessing a firm’s financial resources; and n What the FCA expects firms to do when carrying out their own assessment of adequate financial resources. The FCA will be continuing with its supervisory engagement with firms using the five conduct questions as a backdrop to discussions. Its attention is increasingly turning to the effectiveness of programmes so far and the potential for more sustainable mindset change. Culture and governance continues to be one of the FCA’s cross-sector priorities as set out in its 2019/20 business plan, which was published in April 2019 (see April’s issue). BACKGROUND As well as regulating conduct, the FCA is responsible for the ‘prudential’ supervision of ‘solo regulated’ firms (broadly, authorised firms that are not banking or large investment firms). The FCA says that prudential supervision means understanding: n The risks that a firm is exposed to; n How near the firm is to failure as a result of those risks; and n How a failure can be as orderly as possible, minimising the harm caused to consumers and the financial system. FCA solo-regulated firms are subject to ‘threshold conditions’ in the COND sourcebook, which set out minimum conditions that they must continue to satisfy in order to retain permission to carry out regulated activities. Those minimum conditions include having appropriate levels of financial resources. Firms are also subject to the Principles for Businesses (PRIN) rules, which, among other things, require firms to organise and control their affairs responsibly and to hold adequate financial resources.

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Assessing Adequate Financial Resources (continued)

WHAT THE FCA EXPECTS FIRMS TO DO The FCA stresses the importance of combining effective governance and leadership with appropriate risk management and controls within a firm. This should promote a culture where risks are managed and mitigated, reducing the risk of financial shocks causing the firm to become unable to meet its liabilities. The Consultation Paper contains a lot of detail about how a firm should assess the adequacy of its financial resources and each firm will need to decide what’s appropriate and proportionate for its business but some key points are as follows: n Assessments should be regular, at least annual, but the FCA stresses that they should also be proportionate to the size and nature of the business; n Assessments should be forward-looking and should consider the impact of severe but plausible adverse circumstances; n Financial resources include capital resources and liquid resources; n Capital resources include elements of the firm’s equity and also debt that would rank behind general creditors in the event of an insolvency. Firms should assess potential changes in the book value of assets or liabilities in order to ensure they remain solvent or fail in an orderly way; n Liquid resources are those that can be converted to ‘cash’ at short notice; n For our readers, a key reason why adequate capital and liquid resources might be required will be meeting (potential) compensation liabilities, whether arising from redress schemes or individual disputes; n A firm’s management should have a clear understanding of its business and is expected to be involved in, and bear responsibility for: • assessing the risks to the business; • setting policy and strategy; and • communicating policies and strategy to all relevant staff. n Firms should have a clear and quantified risk appetite, which is understood and followed across the firm; n When considering whether a firm’s financial resources are ‘appropriate’ the management must consider: • The nature and scale of the firm’s business; • The risks that could cause the firm to fail; and • If a member of a Group, the risk posed by other members of the group.

n The FCA highlights certain areas/risks that management should be particularly conscious of: • Managing/avoiding conflicts of interest; • Supervising outsourcers (a firm can’t contract out its regulatory obligations); and • Financial pressures can motivate behaviour that is harmful to consumers. The FCA consultation paper can be found here: https://www.fca.org.uk/publication/consultation/cp19-20.pdf. The deadline for comments to be received by the FCA is 13 September 2019, after which it will issue final guidance.

WHAT SHOULD FIRMS DO NOW? Consider whether your assessment of the adequacy of your firm’s financial resources meets the standards expected by the FCA and make improvements where required. Consider responding to the Consultation Paper by 13 September where you would like to express a view on the FCA’s guidance. When the FCA issues its final guidance on this topic, we’ll cover it in a future issue of Regulation Matters. At TenetSelect we offer themed audits to provide support and clarity for all your regulatory requirements. For more information or to chat with one of our experts, please call us on 0800 085 0825.

CLICK HERE to return to page 4.

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A range of services to add value to your firm At TenetSelect, we provide a wide range of services and expertise to help directly authorised firms meet their compliance requirements and grow their business. If you have a particular compliance concern or any of our services are of interest, please get in touch by calling 0800 085 0825.

COMPLIANCE SUPPORT SOLUTIONS File checking service n Full range of product areas covered, including pension transfers Themed audit n Systems & controls, Training & Competence, disclosure & ongoing servicing, Centralised Investment Proposition Fully outsourced T&C implementation n One-to-one visits, file reviews, observations/role plays Compliance helpdesk for ongoing queries n Access to our regulatory experts as and when you need support Financial promotions and stationery approval n Assessment of your marketing and stationery to help ensure it meets the FCA’s requirements On-site attendance for FCA visit n A regulatory expert on hand to reduce potential risk Comprehensive compliance guidance manual n Manual which you can adopt for your firm Compliance, systems & controls template documentation n Wide range of documentation available via the Extranet Full suite of regulatory registers n Designed to capture a variety of management information and highlight potential risks Regulatory guidance bulletins n Ongoing updates and guidance to help you remain compliant RMAR report completion n Software to help you do it or outsource it to us Complaint handling service n Outsource the handling of client complaints

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