MOJ Issues Quarterly Enforcement Bulletin

Between July and September 2014, the Claims Management Regulator at the Ministry of Justice (MoJ) cancelled the authorisation of 16 claims management companies (CMCs) as a result of wrongdoing, and warned a further 48 companies. In addition, 25 investigations commenced during this period.

In its quarterly enforcement bulletin, the MoJ summarised the work it had carried out into four categories: payment protection insurance (PPI) and other areas of financial services, nuisance calls and texts, the personal injury referral fee ban and insurance fraud.

The bulletin says that:

“The practices of some CMCs specialising in financial claims, particularly mis-sold payment protection insurance (PPI), continue to concern consumers and the financial services industry.”

During the three month period, almost 20 CMCs that deal with PPI were warned. Issues ranged from marketing practices to complaints handling and quality of documentation (such as letters of authority and Financial Ombudsman Service forms). Six PPI companies lost their authorisation for failing to pay their authorisation fee, and investigations into six more companies commenced.

The MoJ revealed it has concerns about CMCs handling packaged bank account claims, and also reminded companies that the most recent changes to the Conduct of Authorised Persons Rules came into force on October 1. These new rules include: a requirement to establish that claims have a realistic chance of success before submitting them; new obligations to provide evidence to back up claims; the need to have procedures for dealing with vulnerable customers; and the need to conduct thorough audits of data obtained, e.g. sources of marketing leads.

Regarding nuisance calls and texts, the MoJ said it had warned seven companies engaged in lead generation, and that six investigations were ongoing. The regulator continues to work with the Information Commissioner’s Office in this area.

Since the release of the bulletin, the Government has announced that it plans to amend the Privacy and Electronic Communications (EC Directive) Regulations 2003, so that action can be taken against firms should their marketing communications cause ‘annoyance, inconvenience or anxiety’. At present, communications must cause ‘substantial damage’ or ‘substantial distress’ before action can be taken. All CMCs must take note of the proposed changes.

10 companies have been warned over the personal injury referral fee ban, with another 65 companies forced to amend their practices so that they are compliant. The bulletin also says that the number of CMCs handling personal injury claims has more than halved in the last 20 months, from around 2,300 in January 2013 to under 1,140 at the end of September 2014.

The regulator also revealed it is working with City of London Police and the Insurance Fraud Bureau regarding an ongoing investigation and an ongoing prosecution for insurance fraud.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.


Director at the FCA Speaks at Consumer Credit Seminar

FCA director speaks at credit seminar

The impact of consumer credit regulation on the regulator, the changes firms should be seeing in the regulatory supervision regime, key areas of concern and the process of upgrading firms’ interim permissions were all covered in a speech made on October 21 2014 by Linda Woodall, Director of Mortgage and Consumer Lending at the Financial Conduct Authority (FCA).

Addressing the Consumer Credit Seminar of the British Bankers Association, Ms Woodall began by saying that there was “still a lot to do to ensure we have a fair consumer credit market that delivers good consumer outcomes.”

She highlighted that bringing consumer credit into the FCA’s remit had taken the number of authorised firms to over 70,000, and that two thirds of these were credit firms.

Next, Ms Woodall highlighted the ‘treating customers fairly’ principle, and stressed that this should mean customers experience good outcomes at every stage of their dealings with a firm, including:

  • Financial promotions
  • Clarity of terms and conditions
  • Customer service over the lifetime of the product
  • Debt recovery practices
  • Handling of complaints when these are made

Firms were reminded to double check when their application period is for upgrading their interim permission to either full permission or limited permission, and to ensure that they do not miss their deadline. It was also stressed that firms need to be complying with the full FCA rulebook right now, and cannot wait until they have obtained full permission before embracing the new regime.

Next, mention was made of the way the FCA supervises firms, and the ‘three pillars’ approach. These ‘pillars’ are:

  • Proactive firm supervision – its regular programme of supervision. Debt collectors and pawnbrokers were warned to expect possible visits in the near future.
  • Event-driven, reactive supervision – what happens once issues of concern have been identified, such as large numbers of complaints or evidence of mis-selling. If the additional supervision of a firm carried out at this stage confirms the FCA’s concerns, enforcement action may follow. Credit broking, debt management, debt collection, payday lending, unsecured lending and credit cards are the areas that have given rise to the most issues in the first six months of credit regulation.
  • Issues and products supervision – supervising business sectors to identify areas of concern. Examples of this form of supervision include the ongoing thematic reviews on the forbearance practices of payday and other high cost short-term lenders; and on the advice given by debt managers.

Ms Woodall then gave details of the enforcement actions the FCA has already taken against credit firms, including:

  • Two application refusals
  • Seven firms having their bank accounts frozen
  • Seven being forced to appoint a ‘skilled person’ to carry out a review of their operations
  • 14 agreeing to stop accepting new business

Several issues were then highlighted, which firms might like to pay particular attention to. Regarding financial promotions (where the FCA has already identified 227 cases of credit promotions which breach its rules), mention was made of payday lenders failing to disclose the Annual Percentage Rate, debt managers making misleading statements about the cost of their service and firms of all types implying that credit was guaranteed regardless of circumstances.

Firms were reminded that if they outsource any activity which is FCA-regulated, then the third party firms used must also be authorised. The example given in the speech is of outsourcing firms who are engaged to provide administrative support, but then stray into handling queries about a customer’s credit position.

Towards the end of the speech, Ms Woodall explained that the FCA was not seeking to prevent firms from operating, but was simply trying to improve standards within the market. “We’re not clamping down on the credit market, but on unaffordable lending and unfair treatment of consumers,” said the FCA director.

The information shown in this article was correct at the time of publication.  Articles are not routinely reviewed and as such are not updated.  Please be aware the facts, circumstances or legal position may change after publication of the article.


Understanding Consumer Credit Regulation

Consumer credit firms are now subject to regulation by the Financial Conduct Authority (FCA). Its regulatory regime is undoubtedly tougher than that operated by the previous regulator, the Office of Fair Trading.

Authorisation Applications

OFT Consumer Credit Licences have now lapsed, and since April 1 2014, former licence holders who wished to continue trading have held ‘interim permission’ from the FCA. The process has now started upgrading these firms to either full permission (higher risk firms) or limited permission (lower risk firms). All firms have been allocated a three month application period, dependent on the type of business they transact. When applying to upgrade their authorisation, firms are required to provide information similar to that required from any other financial services firm that might apply for authorisation.

New Rules

The consistent theme of the switch to FCA regulation is a tougher regulatory environment. Not only is the application process more rigorous, but many credit firms are now subject to additional rules. There are new requirements regarding the handling of client money for debt managers; and requirements for payday lenders relating to rollovers, Continuous Payment Authority and risk warnings on promotional material.


The FCA also has more resources to scrutinise firms than the OFT did. In many cases, the OFT only acted when complaints were received about a firm, or it came into possession of other evidence indicating issues of concern. However, the FCA has a formal supervision programme whereby every firm will be subject to some form of monitoring at least every four years, and where higher risk firms can expect to be monitored more frequently.

The FCA regards payday lenders, pawnbrokers, credit reference agencies and debt collection firms as posing a higher risk than certain other credit sectors, and firms in these areas can expect close scrutiny. In the six months since the FCA became the credit regulator, the action of one form or another has been taken against payday lenders Wonga, Dollar Financial and The Cheque Centre.

Enforcement Action

Firms can expect that action may be taken against them should they:

  • Breach FCA rules and/or principles
  • Breach any associated consumer credit legislation
  • Breach anti-money laundering legislation
  • Conduct business without the required permissions

The FCA can impose a wider range of enforcement penalties than was the case under the OFT. It can issue fines and warnings, ban individuals from working in financial services or withdraw a firm’s authorisation to trade. It can take action regarding conduct that occurred prior to April 1 2014, but only in accordance with the legislation that applied at the time.

Any firm seeking guidance on the new regulatory regime is advised to seek expert assistance. Contact us for more information on these new consumer credit regulations or visit our other pages for additional details.


FCA Takes Action against Debt Management Firms

FCA reveals action against 30 debt managers so far

As of late October 2014, action of one type or another has been taken against more than 30 debt management firms since the Financial Conduct Authority (FCA) took over as regulator of consumer credit on April 1 2014.

Two firms have had their authorisation applications refused. Seven firms have seen their bank accounts frozen – these include Gregson, Brooke Financial Services, One Tick and the Money Management Service.

Seven more have been forced to appoint a “skilled person” to conduct a Section 166 review. The FCA commissions such a review when it has concerns about one or more areas of a firm and wants to gather additional information as a result.

14 firms have ‘voluntarily’ exited the debt management sector. However, these firms include Debt Help & Advice and its affiliate company First Step Finance, which had previously been the subject of action by the former regulator, the Office of Fair Trading.

The FCA has consistently said that it would regard debt management firms as high risk, and has warned these firms to expect close scrutiny.

In late September 2014, just days before the application period for debt managers to apply to the FCA for full permission commenced, the FCA issued a general warning to the sector regarding its compliance standards. Areas of concern identified by the regulator included:

  • The suitability of advice given
  • The levels of staff training and expertise
  • Whether staff are motivated by financial incentives, or by securing the best outcome for their customers
  • Whether fees are fair and transparent
  • Arrangements for protecting client money
  • Whether firms are meeting their obligations to refer customers to sources of free debt advice, and to make them aware of the Money Advice Service.

Regarding client money, new rules were introduced in April, and it is understood that some firms have not been passing on payments received from customers to their creditors, while others are failing to hold client money in separate bank accounts.

All commercial debt adjusters will need to have upgraded their limited permission to full permission by March 31 2015 at the latest (the deadline is as early as the end of 2014 in certain geographical areas). But the need to comply with FCA regulations and principles already applies – it is not acceptable to wait until full authorisation has been received before embracing the new regime.

Victoria Raffe, director of authorisations at the FCA, said:

“[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][Debt management] firms are advising consumers who have often reached rock bottom, so it’s important that firms get it right. Many firms are falling well short of our expectations and they will need to raise their game if they want to continue operating.”

The information shown in this article was correct at the time of publication.  Articles are not routinely reviewed and as such are not updated.  Please be aware the facts, circumstances or legal position may change after publication of the article[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]


Pension Reforms from April 2014

Treasury summarises recent pension changes

In early October 2014, the Treasury published a nine-point guide to the Government’s wide ranging pension reforms, which come into force in April 2015.

Point 1 summarises the key concept announced in the 2014 Budget, which is that pensioners will be able to withdraw as much of their (defined contribution) pension savings as they wish at any stage. These withdrawals will be taxed at no more than the individual’s marginal rate of income tax.

Point 2 highlights that 25% of a pension fund will still be tax free. Of each lump sum withdrawal, the first 25% will be tax free, with the remainder subject to income tax. Some commentators have described the ability to make unlimited withdrawals as making a pension fund similar to a bank account.

Points 3 and 4 highlight just how many people could take advantage of the reforms. Whilst the changes relate to defined contribution (money purchase) pension schemes, members of defined benefit (final salary) schemes will be allowed to transfer to a defined contribution scheme to allow them to benefit from the new freedoms. Having said that, any financial adviser recommending such a transfer must be confident that the switch is in the customer’s best interests.

Point 5 refers to the most recently announced change. There will no longer be a 55% tax on drawdown pensions or uncrystallised pension benefits passed on to family members on death. Those dying before the age of 75 can pass on their pension tax free, provided that their loved ones take the benefits as lump sums or via a drawdown arrangement. Those who die at age 75 or over can pass on their pension income to nominated beneficiaries, who will be taxed on the benefits at their marginal income tax rate. The only circumstances in which a punitive tax rate (45%) would still be levied are if the beneficiaries take lump sum benefits from a pensioner who died at age 75 or above. These changes do not apply to annuities.

Point 6 highlights the availability of free guidance for all on their retirement options. The guidance can be accessed online, over the phone or face to face. However this guidance, to be delivered by Citizens Advice and The Pensions Advisory Service, will fall short of the comprehensive advice offering which is available from a financial adviser.

Point 7 states that all pension providers will be required to make customers who are approaching retirement aware of the availability of the guidance.

Point 8 re-iterates that the implementation date for the reforms is April 2015. Anyone over the age of 55 at the time will be able to take advantage of the new freedoms from that date. People who reach the age of 55 after April 2015 will be able to take advantage of the new regime from the date of their 55th birthday.

Point 9 says that no customer needs to take any action in advance of the implementation date.

Some questions have been asked about how easy it might be for certain pension providers to facilitate these changes, but the UK’s retirement landscape is certainly about to change radically.

The UK’s financial advisers could have a vital role to play in educating those approaching retirement on their options. The changes may also make it easier to promote pension savings to younger people, who may be encouraged to learn that they will enjoy greater flexibility over how to take their benefits.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.


Financial Advice Firms Ordered to Repay Commission

Firms ordered by FOS to repay commission over lack of ongoing advice

Many, if not most, of the UK’s financial advice firms have received regular trail commission, dating back several years. But firms might like to note two recent judgements from the Financial Ombudsman Service (FOS), where the Ombudsman has ordered firms to repay trail commission due to a lack of service being provided in return.

Firstly, HSBC was ordered to refund trail commission regarding a pension transfer. The client switched his pension to HSBC in 2006. In 2009, he attempted, unsuccessfully, to get a review meeting.

HSBC partially upheld the complaint and agreed to refund the trail commission paid between 2009 and 2013. But the FOS went further and instructed the bank to refund all trail commission paid since the start of the client relationship, plus £350 for stress and inconvenience, although HSBC can retain the initial commission received for setting up the plan.

Ombudsman David Ashley’s ruling read as follows:

“Having moved his not inconsiderable pension funds to HSBC to ensure an adequate income in retirement, he was effectively left to fend for himself. Attempts to gain a review at a time when it was most needed proved unsuccessful. So although I accept that the first two payments of tax free cash were paid, I agree with the adjudicator that largely, no further service was provided after the contract had been arranged.”

Subsequently, IFA network Positive Solutions fell foul of the FOS over this issue. A pension client asked for ongoing advice from the network, but she was told this would only be possible if she made a further payment for this. Given that total commission payable would have been around £5,300, when the initial commission was only £750, the client complained.

Positive Solutions rejected the complaint, saying that the trail commission provided for an “informal agreement” for ongoing advice over a period of four years, but that this was conditional on the client maintaining her contributions. However, the FOS believed that the size of the trail commission meant that “six or seven years” ongoing service would be more appropriate. Positive Solutions was ordered to repay the full trail commission plus £200 for stress and inconvenience.

Ombudsman Roy Milne said:

“[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][The client] has clearly been inconvenienced because she has not had access to advice and has paid for a service she has not received.”

Some firms are now worried about the precedent these judgements might set. In many cases, trail commission was taken simply as a way of reducing the initial commission, and an explicit agreement to provide ongoing advice in return was not always in place. However, in 2012, the regulator at the time, the Financial Services Authority, made it clear to firms that it believed that trail commission should only be received in return for advice given.

Firms are now banned from receiving commission for investment and pension advice. But the same principle applies to any ongoing advice fees taken, i.e. that an agreed level of ongoing service must be provided in return.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.


Citizens Advice Finds Limited Improvement in Payday Lenders’ Standards

The latest results of a survey by consumer advice body Citizens Advice (CitA) reveal that the UK’s payday lenders appear to have made some small improvements in their practices. However, the proportion of firms completing each of the essential steps remains low in many cases.

CitA has now surveyed 5,333 payday loan customers since November 26 2012, the date on which the Good Practice Customer Charter came into force. The survey asks customers to rate their lender according to 10 important criteria.

The results are divided up into three periods: November 26 2012 to November 25 2013, April 1 2013 to March 31 2014, and April 1 2014 to August 31 2014. This last period coincides of course with the introduction of Financial Conduct Authority (FCA) regulation.

On seven of the ten measures, the overall score has improved, although none of these seven tasks were carried out in the majority of cases. In the period since April 1 2014:

• 50% of customers said their lender asked questions about their personal finances (up from 42% in the previous period)
• 36% extended their loan without being pressured into doing so (up from 32%)
• 26% said they had no difficulties in repaying their loan (up from 23%)
• 26% said they were treated sympathetically when in difficulty (up from 18%)
• 22% were made aware of the risks of extending their loan (up from 18%)
• 19% were offered a freeze on interest and/or charges (up from 16%)
• 19% were informed of sources of free debt advice (up from 10%)

In two more areas, the score for the period since April 1 2014 was unchanged from that recorded in the 12 months ending March 31 2013. Once again, 37% said the costs of extending a loan were made clear, and 16% said their personal finances were assessed before an extension was granted.

In only one of the 10 criteria did the score fall, however this is also the only criteria in which the majority of customers considered that the action was carried out. 75% said they were informed of the repayment amounts, compared to 79% in the previous survey period.

Gillian Guy, Chief Executive of CitA, said of the latest results: “Payday lenders are still not sticking to their word to treat people fairly. While things are moving in the right direction, some payday lenders are still falling far short of responsible lending. Customers need to have the full facts at their fingertips when making decisions about borrowing.”

She also called on the regulator to act, by saying: “The new rules should contribute towards ridding the market of irresponsible lenders, but this won’t be achieved by regulation alone. The FCA needs to use enforcement action to make sure firms flouting the rules are not allowed to operate.”

For more information on FCA compliance, visit our Compliance Training page.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.


FCA consults on Mortgage Credit Directive implementation

The financial regulator, the Financial Conduct Authority (FCA), has published details of how it proposes to implement the European Union’s Mortgage Credit Directive. Most of the provisions of the Directive need to be in force in the UK by March 21 2016.

The greatest impact of the changes will be on firms who offer second charge mortgages, which are sometimes known as secured loans. Essentially, once the Directive is in force, these products will be subject to similar standards to those which currently apply to first charge mortgages. Hence, from March 2016 the most important section of the FCA Handbook for second charge lenders and brokers will be the Mortgage Conduct of Business Rules (MCOBS), and not the Consumer Credit Rules (CONC) as at present.

Firms offering second charges can therefore expect to be subject to the same requirements for proving affordability which currently apply to first charge mortgages. Second charge advisers will be expected to make customers aware of all available options: second charge mortgage, re-mortgage, further advance with existing lender, unsecured loan etc. They will also be expected to comply with rules on pre and post-sale disclosure, and submit the same level of data on regulatory reports as first charge firms.

Second charge firms will be able to apply to the FCA for mortgage permissions from April 2015.

Individuals giving advice on second charge mortgages will also need to hold an appropriate qualification, such as the Mortgage Advice Qualification or the Certificate in Mortgage Advice and Practice. However, this requirement will not come into force until September 21 2018.

Lenders and brokers who offer first charge mortgages can be re-assured that the Directive will not bring about another change of similar magnitude to the Mortgage Market Review. In most cases, the FCA’s existing rules regarding first charge mortgages already satisfy the requirements of the Directive.

However, there will be new requirements for first charge mortgage firms in the area of post-sale disclosure. Firms will need to issue a European Standardised Information Sheet (ESIS) instead of a Key Features Illustration (KFI). The ESIS will require additional information which does not currently appear on a KFI, including:

  • Details of the new right to a seven day cancellation period
  • An illustration of the effect on payments that would occur were interest rates to rise to the highest level experienced in the previous 20 years
  • For foreign currency mortgages, an illustration of the effect on payments that a 20% change in the exchange rate would have

Until March 21 2019, first charge firms will be able to rely on a ‘topped-up KFI’, but after this date will need to provide a full ESIS. Second charge firms will need to provide the ESIS from March 21 2016.

A consultation on the proposals runs until December 29 2014, and firms, trade associations and consumer groups are invited to respond. However, it should be noted that, under EU law, the new rules will need to satisfy the provisions of the Directive, and so the scope for changes may be limited. The new mortgage rules firms will be subject to as a result of the Directive should be published in the first quarter of 2015.

Lifetime mortgages, most bridging loans, most business loans and credit union mortgages are exempt from the Directive.

Christopher Woolard, FCA director of policy, risk and research said of the proposed changes:

“We recognise that second charge mortgages are beneficial for some customers but we are concerned that consumers can be put at risk by poor sales practices and ineffective affordability assessments. Given the risk of consumer detriment, we want to embed good practice and we believe that applying our mortgage rules is the best way to do this.”

The information shown in this article was correct at the time of publication.  Articles are not routinely reviewed and as such are not updated.  Please be aware the facts, circumstances or legal position may change after publication of the article.


FCA bans adviser for failing to disclose investment interests

In September 2014, the Financial Conduct Authority (FCA) banned Peter Carron from working in financial services, as well as fining him £300,000. Mr Carron failed to disclose to his clients that he had a personal interest in his investment recommendations, and also made a number of unjustifiable claims about the likely rates of return from these investments. 11 clients of Mr Carron lost considerable sums as a result.

Mr Carron appealed an original FCA decision on the matter to the Upper Tribunal (Tax and Chancery Chamber), but on July 22 2014, that appeal was rejected.

Mr Carron was a senior adviser at St James’s Place Wealth Management Plc (SJP), one of the UK’s largest financial advisory practices. He also owned majority stakes and held the position of Director in three other firms: Primrose Associates Limited, a mortgage brokerage; Evaluate Technologies Limited, which offered online mortgage sourcing services; and Comment Technologies Limited, a technology company related to social networking sites aimed at businesses.

Over a six year period, commencing in 2004, Mr Carron advised 11 SJP clients to invest in these three companies. However, when they all went into liquidation between May and August 2010, the 11 clients lost £2.2 million of the £2.4 million they had invested between them.

Mr Carron failed to inform any of his clients of his personal interest in the investments, i.e. that he owned and controlled the companies in question; and also told investors to expect a minimum return of 10% on their investment. Even when he knew that his three companies were in financial difficulty, in January 2009, he continued to recommend these investments.

The FCA also comments that Mr Carron falsely allowed his clients to believe that SJP had endorsed the investments, that his primary motivation was to secure funding for his companies rather than to protect clients’ interests, and also that he failed to assess whether this type of investment was suitable for his clients.

SJP has paid a total of £1.9 million in compensation to the affected clients. The FCA has stressed that it has no reason to fault SJP’s conduct in this matter, and has not taken any action against the firm.

In August 2014, Mr Carron was also banned by the High Court from acting as a director or controlling/managing any company for a period of 13 years.

Tracey McDermott, director of enforcement and financial crime, said of Mr Carron’s conduct:

“People go to advisers because they want expert help on how to make the most of their money. They are entitled to expect that their adviser will act in their best interests, not his own. Advisers should think very carefully and make clear and full disclosure if they are intending to advise clients to invest in ventures in which they have an interest.”

Most financial advisers would not expect to find themselves in the same position as Mr Corcoran, i.e. where they own other companies and are in a position to offer investment opportunities in those companies. However, this episode highlights two important issues: firstly that advisers must fully disclose to their clients any conflicts of interest which may arise as a result of business activities; and secondly that the risks of any course of action must be thoroughly explained, and promises of a particular rate of return cannot be given unless that return really is 100% guaranteed.

The information shown in this article was correct at the time of publication.  Articles are not routinely reviewed and as such are not updated.  Please be aware the facts, circumstances or legal position may change after publication of the article.


FCA amends thematic review on independence definition

The Financial Conduct Authority (FCA) has provided clarification of one important issue concerning the independence or otherwise of financial advisory firms. Back in March 2014, the regulator surprised many by saying in a thematic review that each individual adviser within a firm had to be able to individually advise on all products for the firm to be considered as independent, but it now appears that the regulator no longer believes this to be the case.

The relevant sentence within the review document read: “Every adviser in an independent firm must give advice that meets the independence rule if the firm holds itself as being independent.” The only permitted exceptions, according to this review, were for occupational pension transfers and long term care insurance cases.

Some advisers, commentators and experts questioned this, saying that all previous FCA correspondence had indicated that the independence definition would still be satisfied if the original adviser passed the case on to a colleague within the firm who had more expertise in a particular area. Peter Hamilton, a barrister specialising in financial services, even went as far as to suggest that firms should ignore the thematic review. Chris Hannant, director general of the trade association the Association of Professional Advisers, suggested that the guidance could prevent independent firms from taking on trainee advisers.

Now, in late September 2014, the FCA appears to have backtracked on its previous position. It has issued a statement saying that a number of firms have suggested that passing cases on to product specialists within the same firm is both acceptable under existing rules, and likely to lead to improved outcomes for customers. The regulator says it agrees with this feedback, and now says that: “firms can use internal specialists if they have appropriate systems and controls in place to ensure that personal recommendations provided by their advisers meet the required standard.”

The March 2014 thematic review has now been amended so that a disclaimer appears in section 4 under the heading ‘Referrals to other advisers’. This asks firms to disregard the text which follows, and instead invites them to look at guidance issued by the Financial Services Authority in 2012.

FCA director of policy David Geale said of the apparent change of heart:

“The FCA and the industry may not always be in agreement, but we aim to be responsive, provide insight into our thinking and where necessary, consider issues again.”

In summary, the FCA has clarified that it is the firm which needs to meet the independence definition, not each individual adviser within the firm. Firms still need to make sure that, for every client who seeks investment advice, all relevant products are considered before a recommendation is made, and that sufficient providers are considered to represent a ‘comprehensive and fair analysis of the market’. The independence definition encompasses products such as:

  • Life insurance based investments, such as investment bonds
  • Collective investment schemes
  • Stakeholder and personal pensions
  • Unit trusts
  • Investment trusts
  • Structured investments

Firms should also note that the other issues mentioned in the thematic review remain valid. For example, it is still the case that it is not acceptable to consider a limited range of products and remain independent; nor is it possible to be independent while making exclusive use of a single investment platform.

The information shown in this article was correct at the time of publication.  Articles are not routinely reviewed and as such are not updated.  Please be aware the facts, circumstances or legal position may change after publication of the article.