Regulation Matters March 2020

March 2020

Regulation Matters 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 prodRegulation Matters is produced by TenetSelect as guidance only and is based on their interpretation, it inot 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

MEETING YOUR FIRM’S CAPITAL RESOURCES REQUIREMENTS – SUBORDINATED LOANS

All firms

Short term reductions in turnover entered onto a firm’s RMAR could cause its capital resources to dip below the required level. Subordinated loans might be solution in some cases. FCA commentary on some known issues and information which may inform our approach to market and regulatory changes. FCA believes there is a need to intervene to encourage customers to consider switching. A collection of essays from industry leaders and other experts on how to drive sustainable and healthy cultures in financial services firms.

For your information

FCA ANNUAL “SECTOR VIEWS”

All firms

For your information

FCA RESEARCH ON MORTGAGE SWITCHING

Mortgage Advisers

For your information

FCA DISCUSSION PAPER DP20/1 – TRANSFORMING CULTURE IN FINANCIAL SERVICES

All firms

For your information

FCA QUARTERLY CONSULTATION 27

All firms

Covering some proposed handbook amendments.

For your information

FCA INSIGHTS FROM CYBER COORDINATION GROUPS FCA PROPOSED BAN ON CONTINGENT CHARGING FOR DB PENSION TRANSFER ADVICE (AND RELATED MEASURES)

All firms

Not guidance or rules; insight from working groups and common identified themes.

For your information

All firms active in the DB Pension Transfer Advice Market

Publication of the Policy Statement and final rules delayed to later in the year.

For your information

REMINDER OF KEY REGULATION MATTERS

All firms

Actions recommended in last month’s issue of Regulation Matters ( February 2020 ).

For your information

REGULATORY MATTERS ON THE HORIZON

All firms

Overview of FCA planned activity.

For your information

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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Meeting your firm’s capital resources requirements – subordinated loans AT A GLANCE

n F irms are required to meet their capital resources requirements at all times n W e have seen some press comment indicating that the FCA has indicated that firms of financial advisers can allow their capital resources to reduce to below the minimum level at this time. However, the FCA was not referring to financial advisers when it issued the relevant update, which can be read here: https://www.fca.org.uk/news/statements/fca-expectations-financial-resilience- fca-solo-regulated-firms n S hort term reductions in turnover at this time, when entered into a firm’s RMAR could cause a firm’s calculated level of capital resources to dip below the required minimum level n W here that happens, the FCA expects firms to notify it and to provide a plan for correcting the breach n S ubordinated loans from directors/shareholders will be a potential solution but legal advice is a must to ensure all parties understand what they are committing to

Want to know more? CLICK HERE (or turn to page 9) for a more detailed summary.

FCA Annual ‘Sector Views’ AT A GLANCE

The FCA annual publication identifies the following key risk areas: n A desire to increase consumer engagement and switching for products such as general insurance and mortgages in order to deal with the ‘loyalty penalty’ paid by some consumers n E nsuring that firms make allowances for vulnerable consumers n S cams and high risk unregulated investments n C oncern about poor DB pension transfer advice n T he costs of drawdown pension plans and whether conflicts of interest arising from ongoing adviser charges are being managed n A lack of availability of ‘one-off’ transactional advice for retail clients, resulting in consumers making poor decisions without advice n A ttempts to combat ‘Phoenixing’ because of the damage this causes to the sector and, ultimately, consumers n P ricing in mainstream collective investment funds and their exposure to higher risk/potentially illiquid assets n T he risks of increasing demand for ESG investments while there are no recognised standards n H igh-risk retails investments (such as mini-bonds and CFDs) being marketed and sold to customers who don’t have full understanding of the complexity of the products and the level of risk they are taking.

Want to know more? The full publication can be accessed here: FCA Annual ‘Sector Views’

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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FCA Research on Mortgage Switching

AT A GLANCE

The FCA has published an article summarising its findings from its research into mortgage switching. The FCA have concluded from the research that there is a case for intervening to help mortgage customers who do not switch. The research found that those who did not switch tended to be older, have a lower average income by household, and tended to have dealt directly with a lender instead of an adviser. The FCA intend to consult on their proposed remedies and responses in Q2 2020.

Want to know more? The FCA research can be accessed here: https://www.fca.org.uk/news/news-stories/fca-issues-research-mortgage-switching

FCA Discussion Paper: DP20/1 Transforming Culture in Financial Services Firms

AT A GLANCE

The FCA has published a collection of essays covering various elements of surrounding culture transformation. The essays range from being firm- and sector-specific through to being thematic, from various authors ranging from Heads and Chief Executives of Banks and Building Societies to Executives of the CII and CBI, and researchers from Universities and Business Schools. Each essay looks at a specific factor or consideration underpinning business culture and how to deliver positive cultural change.

Want to know more? The FCA’s discussion paper can be accessed here: https://www.fca.org.uk/publication/discussion/dp20-1.pdf

FCA Quarterly Consultation 27

AT A GLANCE

Proposed developments in this consultation are relatively minor but readers might wish to take a particular interest in proposals to: n M ake minor changes to the Financial Crime guide as a result of the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (SI 2019/1511), which came into effect on 10th January 2020 n M ake changes to the notification form in the Handbook that is used to amend firms’ details as held by the FCA, albeit firms in practice use the online form via Connect.

Want to know more? The FCA Consultation is available here: Quarterly Consultation 27

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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FCA: Insights from the Cyber Coordination Groups

AT A GLANCE

The FCA has published a research paper summarising the key themes and risks identified by the CCG. n R isks existing in the supply chain where the overall service is dependent on partner practices supporting the end to end service effectively. n S ocial engineering and the risk it poses to data security, confidentiality and integrity of businesses’ systems and people. n R ansomware, and strategies to mitigate the breadth of the damage it can potentially do. n M isuse of customer data by current and former employees and the internal controls that are required to manage the threat.

Want to know more? The FCA publication can be accessed here: https://www.fca.org.uk/publications/research/insights-cyber-coordination-groups

FCA PS19/29: Making Platform Transfers Simpler

AT A GLANCE

New rules and guidance have been introduced following the FCA CP19/12. With effect from 31/07/2020, the rule changes require platforms to offer in-specie switches in order to remove barriers to switching. The rules do not impact on exit fees, which are due to be the subject of a separate Consultation Paper in Q1 2020. From 31st July 2020, both ceding and receiving platformmust offer in-specie unit transfers, giving the option to switch (within the ceding platform) to a unit class that both platforms offer if that is necessary to facilitate an in-specie switch. Post-transfer, the receiving platform will be required to offer a switch of a more advantageous (lower cost) unit class is available on that platform. Once the new rules are introduced, advisers will need to be aware of, and take into account in their recommendations, the fact that platforms – not the adviser’s recommendation - might determine the unit class held by the client as a result of these new rules.

Want to know more? The FCA Policy Statement is available here: https://www.fca.org.uk/publication/policy/ps19-29.pdf

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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CP19/25 - FCA Proposed Ban on Contingent Charging for DB Pension Transfer Advice (and Related Measures) AT A GLANCE The FCA has updated the CP19/25 page on its website re the proposed ban on contingent charging so that it now says that the Policy Statement and finalised rules will be published ‘in the second quarter or third quarter of 2020’. Originally, the new rules were planned to come into effect ‘in Q1 2020’. The FCA has said that it will be delaying regulatory change work that is not critical to protecting consumers and market integrity in the short term during the coronavirus outbreak. However, it’s not clear whether this delay is solely attributable to the coronavirus outbreak because this particular Policy Statement isn’t on the list of publications that the FCA has said would be delayed for that reason here: https://www.fca.org.uk/firms/information-firms-coronavirus-covid-19-response As mentioned in previous updates, firms who do not wish to have to suspend DB transfer advice activity if the new rules are introduced as proposed should be prepared for those proposed changes that are intended to come into effect within one week of the final rules being published by ensuring that: n D B pension transfer clients sign a contingent fee agreement as early as possible in the advice process if the firm would wish to utilise the three-month transitional period; and n T he firm has prepared revised disclosure documents and fee agreements that will comply with the new rules when they are announced; and n T he firm has prepared a robust method of evidencing that the client has demonstrated that they understand the risks of the transaction – before the personal recommendation is made - where a transfer is to be recommended.

Want to know more? The relevant FCA web page is here (see ‘Next Steps’): https://www.fca.org.uk/publications/consultation-papers/cp19-25-pension-transfer-advice

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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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 ( February 2020 ) .

Subject

Recommended Action

Further Information

1

Trust Registration (MLD5)

https://assets.publishing. service.gov.uk/government/ uploads/system/uploads/ attachment_data/file/860269/ Technical_consultation_ document_Fifth_Money_ Laundering_Directive_and_Trust_ Registration_Service.pdf

For information - HMRC has issued a technical consultation on its plans to implement the 5th Money Laundering Directive’s requirement to maintain a register of “express” trusts.

2

PS20/01: Mortgage Advice and Selling Standards

https://www.fca.org.uk/ publication/policy/ps20-01.pdf

Action recommended – With effect from 31st July 2020, advisers must explain why cheaper products have been discounted when recommending a product which is not the cheapest. For information - Summary of outcomes of the lead cases against the Old British Steel Pension Scheme.

3

British Steel Pension

https://www.pensions- ombudsman.org.uk/2020/01/ british-steel-final-determinations/

Scheme – Final Determinations

4

FSCS Management Expenses Levy 2020/21 – CP20/2 Financial Services Duty Of Care Bill 2019-20

https://www.gov.uk/guidance/ april-2020-changes-to-off- payroll-working-for-clients

For information - Consultation paper covering the proposed maximum levy that can be imposed on Firms.

5

https://publications. parliament.uk/pa/bills/ lbill/58-01/011/5801011.pdf

For information – Bill requiring FCA to make rules for authorised persons to owe a duty of care to consumers is reintroduced to the House of Lords.

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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Regulatory Matters on the Horizon

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.

Subject

Publication Type Policy Statement and revised rules Consultation paper

Expected Date Intended Audience

1

Proposed ban on contingent charging for DB Transfer Advice

Delyaed to Q2 or Q3 2020

Firms that provide advice on pension transfers

2

FCA second-stage consultation on guidance on the fair treatment of vulnerable customers FCA review of RDR and the Financial Advice Market SM&CR (Remaining Certification/F&P and Conduct Rules Training obligations) Upload of bulk data to the Financial Services Directory (PS19/7)

Q1 2020

All firms

3

Report

Delayed to ‘Autumn 2020’ 9th December 2020 9th December 2020

All firms

4

Legislation

All firms

5

Policy Statement and revised rules

All firms

CLICK HERE to return to page 3.

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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Meeting Your Firm’s Capital Resources Requirements – Subordinated Loans

Firms will be aware that they must at all times maintain capital resources at least equal to the capital resource requirements in the FCA Handbook. Some firms have wondered if utilising the Government- backed Coronavirus Business Interruption Loan Scheme might help them to meet their capital resources requirement whereas others are concerned that doing so might have an adverse impact by creating a liability. In practice, because of the way that the FCA prescribes how financial resources are calculated, accepting a Government-backed Coronavirus Business Interruption Loan (‘CBIL’) from the scheme should not immediately increase or reduce a firm’s financial resources. However, paying interest on the loan in the future could reduce financial resources, where doing so creates or exacerbates losses. Longer term, reduced income due to the pandemic will put downward pressure on firms’ capital resources requirements. However, in the short term, unless the FCA takes action to ease its requirements, some firms might find that material losses that must be recognised in the period to which they relate could cause their financial resources to fall below the required minimum when completing their RMAR. Where that happens, a Subordinated Loan could be an option to help meet the firm’s capital resources requirement provided the loan meets all of the FCA’s strict requirements. Unlike a CBIL or other conventional loan, a subordinated loan (meeting the FCA’s requirements) is a way in which business owners can make a loan that can help the firm meet its capital resources requirement. However, before entering into a subordinated loan arrangement, you should seek legal advice and think carefully about the implications. As the name suggests, in an insolvency, a subordinated loan is not repaid until other creditors are paid in full. Therefore there is an increased risk that the loan will not be repaid. Other requirements stipulate that, if the borrower doesn’t meet its obligations, the lender’s only remedy is to petition for the firm to be wound up, in which case the lender will rank behind other creditors. Therefore, it is vital to understand what you are committing to before making a subordinated loan. For Personal Investment Firms, the FCA prescribes the wording of the loan agreement and neither interest nor capital can be repaid at any time if doing so would

reduce the firm’s capital resources below 120% of the minimum required. Importantly, there is a restriction on the extent to which a subordinated loan can improve capital resources. For mortgage/GI firms, the restriction is set out in the Handbook at MIPRU 4.4.8(2) and for firms who are (also) personal investment firms, the restriction can be found at IPRU-INV 13.15.9 and IPRU-INV 13.15.10

If you identify that your firm’s capital resources have fallen below the required minimum, the FCA expects you to let them know and to explain how the issue is to be resolved. The FCA provides guidance on how to use subordinated loans here: https://www.fca.org.uk/firms/review- resources/subordinated-loans On 26th March 2020, the FCA issued an update on its expectations in relation to financial resilience for ‘solo regulated firms’ (broadly, firms other than insurers and banks). The update says that the FCA will allow flexibility ‘where [it] can’ in order to help firms to continue operating but, as always, it reinforces the need to inform the FCA on becoming aware that your firm will not meet its capital resources requirements or is unable to meet debts as they fall due. The update can be read here: https://www. fca.org.uk/news/statements/fca-expectations- financial-resilience-fca-solo-regulated-firms

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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Meeting Your Firm’s Capital Resources Requirements – Subordinated Loans (cont.)

We have seen some comment, suggesting that the above FCA update means that firms of advisers can allow their capital resources to dip below the minimum but adviser firms should not interpret the FCA update in that way. Firms that manage client assets and execute trades using client assets are subject to capital resources requirements that include provision for the FCA to specify additional capital buffers based on assessments incorporating scenario/stress testing. Those firms are now being allowed to use their buffers because they are experiencing the kind of situation they were intended for.

However, firms that only provide advice/arranging services (most firms of advisers) don’t have these capital buffers so they must let the FCA know if they do not meet their capital resources requirements (or are unable to meet debts as they fall due) and provide a plan for repairing the breach. The Handbook requirements relating to capital resources and subordinated loans for firms that provide only mortgage/ GI services can be found here: MIPRU Chapter 4 . An example of a subordinated loan agreement meeting the requirements for these firms can be found here: https:// www.handbook.fca.org.uk/form/mipru/pru_ch9_ intermediaries.pdf The requirements relating to capital resources and subordinated loans for firms who are (also) personal investment firms can be found here: IPRU-INV Chapter 13. Personal investment Firms must use the FCA-prescribed agreement form, which can be found on pages 99 to 108 of a document available via a link on this page of the FCA Handbook: https://www.handbook.fca.org.uk/ handbook/IPRU-INV/Annex/D/1.html At TenetSelect we have a team of regulatory consultants and compliance specialists to support firms in meeting their regulatory requirements. Should you require further information on any of the additional services we can offer directly authorised firms please call us on 0800 085 0825 .

CLICK HERE to return to page 3.

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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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

RESEARCH, TECHNICAL & SPECIALIST INVESTMENT SUPPORT Research & technical support n The Tenet panel, technical guidance, including access to a helpdesk Specialist investment support n Review of EIS/BPR/Tax Planning Schemes and the client profile n Feedback on general suitability of the client and the legitimacy of the scheme BUSINESS SUPPORT SOLUTIONS Paraplanning n Full paraplanning service including data gathering research, analysis and client report New adviser recruitment n Our recruitment service will find the right adviser for your business Exclusive software discounts n Range of discounts to save you money CPD events n Invite to our events where you have everything you need for your CPD Marketing support n Utilise our range of compliant marketing support Protection panels n Access to leading terms via our panels Account management n Access to a dedicated account manager to help you make the most of our service

WANT TO KNOW MORE? To find out how your firm could benefit from the many services available or for details of packages and costs, please call 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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