Out-Law News | 07 Feb 2020 | 3:53 pm | 3 min. read
Advisers have also been warned on financial promotions, the need for sufficient professional indemnity insurance (PII) to cover consumer compensation and the increasing sophistication of pensions and investment scams in a 'dear CEO' letter from the UK regulator (4-page / 193LB PDF).
The letter, which came from the FCA's director of life insurance and financial advice supervision Debbie Gupta, sets out the areas of concern on which the regulator intends to focus over the next two years, along with the actions it expects firms to undertake.
The FCA intends to follow up its 2017 suitability review with further work focused on suitability of retirement income advice, reflecting significant changes to the market since the pension freedom reforms of 2015. The FCA is particularly concerned that "large numbers" of members of defined benefit (DB) pension schemes are being advised to transfer out, despite the regulator's position that these transfers will be unsuitable for most consumers.
In the scams context, so much activity is driven by unregulated introducers with limited assets and no insurance that any involvement of a regulated adviser – even peripherally – inevitably comes in for greater scrutiny.
Advisers must also be on the alert for "increasingly sophisticated" scammers, and ensure that they have sufficient oversight of their appointed representatives and the products and services that they recommend, according to the letter. They should be particularly careful about introductions from introducers or 'lead generators', particularly those with influence over the final investment choice; and about non-standard investments.
Pension scams expert Ben Fairhead of Pinsent Masons, the law firm behind Out-Law, said: "This ties in with recent coverage around the losses suffered by British Steel pension scheme members, as well as increased burdens on the Financial Services Compensation Scheme (FSCS) as a result of failing regulated entities".
"In the scams context, so much activity is driven by unregulated introducers with limited assets and no insurance that any involvement of a regulated adviser – even peripherally – inevitably comes in for greater scrutiny. We are seeing increased action on that front from claims management companies in particular," he said.
The FCA is becoming increasingly concerned that some advisers among those offering DB transfer advice, have insufficient PII and financial resources to cover their business activities. "Where this is the case, it increases the risk of firms being unable to put things right where they have caused harm to their clients," Gupta said in the letter.
"The inability to compensate consumers, and the transfer of these costs to other market participants via the FSCS levy, is unfair and places an unnecessary burden on other firms. It also threatens confidence and participation in financial services markets," she said.
In some cases, the PII that they do have in place excludes or places limits on particular business lines, or requires firms to pay 'excess' on claims set "at such a level as to render the cover materially ineffective", according to the letter.
The FCA's temporary ban on the promotion of unlisted speculative 'mini bonds' came into force on 1 January, ahead of a proposed consultation on permanent rules. These products can now only be marketed to investors known to firms as sophisticated or having high net worth status, and only if the associated risks, costs and third party payments made from funds raised are clearly explained.
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Firms will now be clear about key areas of focus for the FCA, and boards must consider the letter and decide on the steps they need to take.
In its letter, the FCA also highlighted new guidance on its existing rules for firms approving the financial promotions of unauthorised persons, which it published in November alongside announcement of the ban. It urged firms to review existing approvals to ensure compliance with the rules.
Financial regulation expert Josie Day of Pinsent Masons said: "Boards of investment advisory firms must now consider the letter and take the relevant steps".
"One area covered is compliance with financial promotion requirements, an area of recent focus for the FCA. It sent out several CEO letters last year on this topic. Under the new letter advisory firms must now assess their financial promotion approvals to make sure they satisfied the FCA's rules and withdraw approval if a promotion does not comply with the FCA's requirements. In addition, firms that approve promotions of unauthorised persons, have done so in the last 12 months or intend to do so are being asked to notify the FCA," she said.
The FCA also used the letter to remind firms that it would be assessing their compliance with the Senior Managers and Certification Regime (SM&CR) as part of its ongoing supervisory work. The SM&CR was extended to most FCA-authorised solo-regulated firms, including financial advisers, on 9 December 2019.
"Firms will now be clear about key areas of focus for the FCA, and boards must consider the letter and decide on the steps they need to take," said Josie Day.
21 Jan 2020
06 Oct 2017