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For those unaware, the Financial Conduct Authority (FCA) does not receive any government monetary support but rather survives off the fees levied off regulated firms. Application fees, fines and annual fees calculated by firm submissions on the Regdata system (formerly GABRIEL) all cover the FCA’s operational costs.

Despite this, the FCA has released consultation paper: CP20/22 in November last year. Relatively under the radar, the FCA is seeking responses from regulated firms on its proposals to raise and restructure its price tags. Broadly, the FCA is looking to increase fees throughout most permission scopes citing inflation and increasing operational costs as the reason for the ‘price hike’. Interestingly, the FCA is focusing on raising application fees more so than existing annual fees as it recognises this will allow firms already trading who have been affected by the pandemic to not suffer further.

The fees increase is in ‘the consultation stage’ where firms can offer responses to the paper and answer the questions within it posed by the FCA. These changes will not really affect existing regulated firms unless Variation of Permissions (VOP) applications are undertaken (which are proposed to be calculated at 50% of the initial fee of the sought after permission) or regulated firms who submit applications for new Approved Persons under the Senior Managers & Certification regime where a fee of £250 will be charged (previously this was free). However, this does present a troubling barrier for markets access for new firms if finalised.

For example Claims Management Companies (CMC) application fees under the current model are calculated on the projected income of the applicant firm. This is set to change to category 6 £10,000 fee irrespective of the regulated income projected, CMCs who will only lead generate and market for claims will all be expected to pay Category 4 £2,500 regardless of income which is also a large increase from its previous cost (108% increase). This could mean smaller firms are out of pocket more severely for applying to the FCA under these new proposals, perhaps this is intended by the FCA as a way to limit its workload.

Another example which is less affected but still set to become more expensive is Mortgage Broking and Insurance Broking applications. Originally a flat £1,500 is also set to increase to Category 4 £2,500. There are some winners however which are set to potentially get cheaper application fees. Consumer Credit Broking applications (depending on complexity) are set to be streamlined and no longer be calculated on income. Full authorisation Credit Broking, at present, is anywhere between £600 – £5000 depending on the income figure submitted. Under the new proposals this will be a Category 3 application of only £1000 irrespective of income.

The general trend by the FCA for these proposals are to remove income dependent fee calculations and streamline the whole fee structure. There is a maximum of 10 categories which arguably does make the fee structure far more straightforward than what firms have to experience now. Despite all this, the new proposals look to set up further barriers for certain firms such as the FCA’s area of focus, CMCs.

If you are a firm looking to set up and gain an FCA authorisation and you are part of a category which is set rise in price, it may be worth submitting your application sooner rather than later. The FCA’s timetable for finalisation is not until June/July of 2021 however, these applications take time so do not waste this opportunity before fees increase. Scott Robert can help with the application process contact us further, for more information on how we can submit your application before the fees inevitably change.

Alternatively, the FCA is welcoming responses from regulated firms, click here for FCA paper: CP 20/22 for your chance to review the changes and give your feedback. Feedback closes on January 22^nd.

Harvey Lewis.

A Manchester-based unregulated collective investment scheme administrator has been ordered to pay restitution of £203,007, which reflects the profits it received from its role as operator of the Connaught Income Fund, Series 1. Had it not been for the evidence of financial hardship it was able to provide, the firm would also have been fined £10 million.

For the first 15 months of the fund’s operation, until October 2009, the fund went by the name of Guaranteed Low Risk Income Fund, Series 1. The firm initially marketed the fund as a low-risk investment offering a guaranteed, fixed return of between 8.15% and 8.5% per quarter. The Fund was promoted in this way until around May 2011, when the FCA published a warning that statements being made about the Fund’s risk profile were misleading. The Fund was not in fact low risk nor was the income guaranteed. A description of ‘low risk’ was never likely to be appropriate given the UCIS lent all its assets to the Specialist Partner, an unregulated private company, which in turn invested directly in property in a specialist sector.

The Fund was designed to allow the Specialist Partner of the Fund to draw down money invested in the Fund to provide short term bridging finance to commercial borrowers in the UK property market. The FCA says that the firm which has been subject to the enforcement action failed in its duty to carry out appropriate due diligence on the Specialist Partner, and also on the Specialist Partner’s parent company, which claimed to guarantee the Fund’s income and the Specialist Partner’s borrowing from the Fund.

A further criticism made by the FCA is that the marketing materials for the Fund contained misleading statements that the Fund’s assets would be used for short term lending – for periods of three to six months – when in fact many of the Fund’s assets were lent for significantly longer terms, such as two years or more.

Other potentially misleading statements in the marketing material included:

• The Fund’s assets would be lent at conservative loan-to-value ratios to increase the likelihood of full recovery in the event of default
• Lending from the Fund for bridging loans would be secured

The FCA makes no criticism of the Specialist Partner or its parent firm.

Scott Robert are compliance consultants based in Manchester delivering solutions to regulated businesses.

The Financial Conduct Authority has fined a Warrington-based firm £107,200 for failing to give appropriate advice relating to self-invested personal pensions and for not effectively managing conflicts of interest.

The FCA says that the firm advised 114 clients to transfer existing occupational and/or personal pensions into a SIPP, whilst neglecting to ensure that the underlying SIPP investments were suitable for the clients given their needs and attitudes to risk. The regulator adds that many of the underlying investments were “high-risk, esoteric and illiquid” – examples included overseas and commercial property developments. More than £6 million was invested in SIPPs by the firm’s clients, but the FCA says that, in many cases, the clients’ investments are now worthless, at a time when they are approaching retirement and have little opportunity to rebuild their retirement savings portfolio.

The FCA says it has seen an email from a senior employee of the firm to the firm’s compliance services provider which says that the firm did not “want to know” what the underlying SIPP investments were. Indeed, the Final Notice contains an email exchange showing that the firm ignored advice from its compliance consultant, which included statements such as:

“It would not be deemed as acceptable to make a recommendation to transfer into a SIPP without making a recommendation as to where the monies should be invested within.”

The FCA reviewed 10 advice files and says that in each of these the firm failed to:

• Provide a recommendation that was tailored to the client’s circumstances
• Assess whether the SIPP was suitable for the customer
• Calculate the full cost of the transfer incurred by the customer
• Fully record the clients’ objectives
• Assess the clients’ attitude to risk, capacity for loss or level of investment knowledge and experience
• Fully assess the benefits being given up (where the client was transferring out of an occupational scheme)

The FCA also comments specifically on Customer A, who had an income of just £6,000 per annum and hence had a very limited capacity for loss. His only asset of any value was his occupational pension scheme. In the event that this pension scheme was depleted, he would have had no means of replenishing it given his low income and this would have had a materially detrimental effect on his standard of living in retirement. His investment knowledge was also limited and the charges on the SIPP were significantly higher than for his previous pension arrangement.

Furthermore, the firm recommended two other firms to its clients – one wrap platform and one discretionary fund manager – without disclosing that it had shareholdings in both firms and that a conflict of interest might therefore exist.

The advice failings lasted for a period of 33 months between March 2010 and December 2012, while the conflicts of interest issues lasted for some 58 months between January 2013 and December 2017.

The FCA believes that the firm was in breach of two of its Principles for Businesses:

In addition to paying the fine, the firm has been forced to pay significant sums in redress to disadvantaged clients. To date, £2,668,819.97 has been paid to 41 clients and the firm continues to assess whether compensation needs to be paid to other clients.

Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said:

“Investors should be able to trust their financial advisers with the pension contributions they’ve built up over a lifetime of hard work. These failings were especially serious because [name of firm] facilitated the transfer of these investors’ pensions into high-risk investments without assessing whether the investments were suitable for investors.

“In many instances, these investments are now worthless and many investors are approaching or already in retirement and so especially vulnerable to the risk of significant losses. Redress is important but these investors should never have been placed in this position in the first place. Investors should also be able to rely on their financial advisers to manage conflicts fairly and to disclose them so investors are able to make better informed decisions.”