10th July 2013

Regulatory Round up Pt 2

FCA Disclosure Wording

The regulator informed firms on 1 May 2013 that it expects them to review their regulatory status disclosures as a priority to ensure they are up to date and accurate following creation of the FCA and PRA.

You should change your stationery, websites, documents, e-mail footers, promotions documents, recorded telephone statements to show the new regulator from at the latest April 2014, but digital/electronic or other easily made changes are expected to be done sooner.

Phoenixing & Churning

The FCA has highlighted a concern whereby certain client banks are being sold where the originating firm retains the liability for the advice it gave. The issue here is that transferring the clients to another firm could be seen as transferring the assets of the firm and therefore "phoenixing".

In future, when the originator firm sends in its Form C to the regulator to cancel its permissions, the FCA is now likely to ask not only about run-off PI cover but also the potential high risk business it has on its books, such as UCIS (NMPIs), EIS, VCT etc. There may also be concerns of the SIPP sales and any UCIS sales contained within those as well. Inadequate responses to this could allow the FCA to exercise the right to refuse the Form C application and even ask the directors for personal guarantees.

In a small amount of cases the regulator has expressed concern about some transferred assets being "churned" in order to create income for the receiving firm to offset what they have paid for the client bank. The replacement business rules apply here and the receiving firm needs to evidence and demonstrate "added value" insomuch as the client is clearly seen to benefit from the transfer. Moving investments or pensions to “consolidate” or “simplify paperwork” is insufficient reason for moving or switching business.

Pension & Investment Switching

Client’s best interest rule COBS 2.1.1R is the subject in the FCA reminding firms that when moving pension and investment policies they must follow strict procedures that clearly demonstrate WHY the transfer of the pension or investment is in the client's best interests. 

This follows on from the FSA's review work into pension switches. The FSA previously identified that the main reasons for unsuitable advice were:

• the switch involved extra costs without good reason
• the fund(s) recommended were not suitable for the customer's attitude to risk
• the adviser failed to explain the need for, or put in place, on-going reviews when they were necessary
• the switch involved loss of benefits from the ceding scheme without good reason.

The FCA has reminded firms that they must have strict systems and controls in place to check files, especially those where replacement business has taken place. These systems can spot trends which may occur with some advisers and identify large amounts of product switching which is fee generating.

The FCA is planning to continue with the on-going review into pension and investment switching.

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Regulation