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OAC Compliance News Roundup No.13 - Published May 2012

Welcome to this, the 13th edition of our monthly Compliance News Roundup, highlighting the regulatory developments which have occurred during the last month which we think will be of interest to our clients. We are in the midst of a very busy period from a regulatory viewpoint.

Subscribe to email announcements when new editions of Compliance News Roundup become available.

  1. FSA Retail Distribution Review Newsletter
  2. RDR: VAT implications for advisers - HMRC guidance
  3. EU issue: Third Money Laundering Directive
  4. Hector Sants' last speech - tougher action needed on senior management
  5. Finalised Guidance FG12/12: Traded Life Policy Investments (TLPIs)
  6. FSA factsheet for Investment Advisers: Exchange Traded Products (ETPs)
  7. FSA publishes new rules to ensure that pension transfers are suitable for scheme members - PS12/8: "Pension transfer value analysis assumptions – feedback to CP12/04 and final rules"
  8. FSCS confirms its levies for 2012/2013
  9. CP12/8: "Changes to the Training and Competence (TC) Sourcebook"
  10. European Commission: Proposal for a General Data Protection Regulation
  11. FSA publishes Recovery and Resolution Plan update
  12. CP12/9: "Consumer redress scheme in respect of unsuitable advice to invest in Arch cru funds"

FSA Retail Distribution Review Newsletter

FSA has published Issue 5 of its Retail Distribution Review Newsletter. Topics include:

  • Research on RDR readiness – giving results of recent FSA research to track how advisers are progressing with the professionalism requirements, eg 93% of advisers are still on track with their prediction to complete the appropriate qualification in time.
  • Getting ready for RDR: reminders for firms – this includes, amongst other issues, a link to the HMRC website giving access to the final guidance on the VAT regime for financial advisers under the RDR. (See more detailed comment on the HMRC statement below.)
  • Assessing suitability: replacement business and centralised investment propositions – we commented on the relevant guidance consultation (GC12/6) in Compliance News Roundup Number 12 last month.
  • Various policy updates on treatment of legacy assets, simplified advice, and RDR adviser charging and Solvency II disclosures.


RDR: VAT implications for advisers - HMRC guidance

HM Revenue & Customs has now issued final guidance on the VAT regime for financial advisers under the RDR (VATFIN7000 – Intermediaries) and it can be viewed on their website.

It clarifies that no VAT is chargeable where the agreed service is intended to result in the firm arranging the sale of a Retail Investment Product to the customer whether or not the process actually results in sale, setting out a helpful list of six steps which it might expect to see in such a process. However, it stresses that if an adviser is giving advice that is not aimed at a sale as would be the case, for example, in a review of the continued suitability of a customer's existing investments, then VAT is chargeable even if some of the same six steps are in evidence.

As a further complication, where one or more of the stages are contracted for under a separate agreement, any charges to the customer for those services will carry VAT at the standard rate. Only services under the agreement intended to result in a sale are exempt. The VAT liability depends on what is done by the adviser and it makes no difference whether a fee is levied up front or over the life of a product (as for example with Regular Contribution products).

It is clear that HMRC will rely on evidence of the intended purpose of the service agreement in each case, so preparing and retaining clear evidence in each case will be critical. We expect that HMRC will conduct a program of inspection of firms’ records supporting claims for exemption. Firms will want to ensure that they hold full and clear records to avoid unexpected VAT levies.


EU issue: Third Money Laundering Directive

The Joint Committee of EBA, ESMA and EIOPA has published two reports on the implementation of the third Money Laundering Directive. The conclusion reached in both reports, unsurprisingly, is that there are significant differences in the implementation across the EU Member States, and that these stem from different national interpretations of the Directive’s requirements.


In addition, the EU Commission has published its own report on the same topic. This report sets out a list of issues to which the Commission will give further consideration, including clarifying how AML supervisory powers apply in cross-border situations, and incorporating new provisions on data protection, in light of the Commission’s proposals published in January 2012.

In our view this report may well be the first step to a new Money Laundering regulation in order to impose the harmony that the existing directive has failed to achieve.


Hector Sants' last speech - tougher action needed on senior management

Entitled “Delivering effective corporate governance: the financial regulator’s role”, Hector Sants sets out in a fairly long speech his desires both for greater accountability, with senior management to be subject to much tougher penalties and board members banned in the event of the failure of a bank.

Sants returned to three familiar themes, that firms should be very frightened of the FSA, that most people in the financial services industry were decent and honest (although implicitly not directors of failed banks, apparently) and that good regulatory judgements should be aligned with good business judgements. There is also an exposition as to what extent the regulator can incentivise the right behaviour and culture in firms. His closing remarks were “ultimately the purpose of financial markets is to serve everyone, not the personal interests of individuals”.

It is unclear whether, in view of his imminent departure, the contents of this speech are a useful indicator of the FSA’s (and its successor bodies’) ongoing thinking about senior management accountability. If they are, it is to be hoped that some of the serious disconnects in his arguments will be addressed by his successor.


Finalised Guidance FG12/12: Traded Life Policy Investments (TLPIs)

The FSA has confirmed plans to ban the promotion of traded life settlement products to retail clients by issuing the above guidance. It views traded life policy investments (TLPIs) as high risk products that should not be promoted to the vast majority of retail investors in the UK. The guidance is an interim measure, in that the FSA will shortly be consulting on new rules imposing significant restrictions on the promotion of non-mainstream investments, including TLPIs, to retail investors.

Whilst this falls short of outright banning of the product by the FSA, we consider that it is a good indicator of the regulator's appetite for intervention where it considers products are unsuitable for the mainstream market. Intervention at a much earlier stage can be expected in future.


FSA factsheet for Investment Advisers: Exchange Traded Products (ETPs)

This factsheet, recently published, is intended for any firm or adviser who currently includes ETPs as part of their advice offering, or is considering including them. FSA states that its work has led it to believe that there are a number of competing views on the risks consumers face if they choose to invest in an ETP, and it wishes to raise awareness of the key features and risks it considers to be important. Advisers would be ill-advised to continue to adopt any of the "competing views"

As well providing an insight into in the areas the FSA might want to be understood and considered by advisers for current business of this type, the list of key features and risks given in the factsheet can also be used by firms as a very useful guide to the criteria against which to assess the suitability of past business in this area.


FSA publishes new rules to ensure that pension transfers are suitable for scheme members – PS12/8: “Pension transfer value analysis assumptions – feedback to CP12/04 and final rules”

This new publication confirms changes to the way pension transfer value analyses are undertaken, and seems to have the intention of making it more difficult for advisers to recommend that an investor should exit from a defined benefit pension scheme.

The FSA’s view is that in the vast majority of cases someone in a defined benefit scheme will not be better off transferring to a personal pension, and that the new assumptions will make it tougher for advisers to make the case for a transfer. As a result of these new rules, it states, it would expect the number of pension transfers to reduce, leaving pension scheme members better off.


FSCS confirms its levies for 2012/2013

The FSCS has set its 2012/2013 levy at £265m, £44m more than its initial proposal, warning that further costs relating to MF Global and spread-betting firm Worldspreads could lead to further levies.

Although there is a general rise in levies, the bulk of the extra costs announced falls on the adviser community, and thus will principally affect firms that give advice.


CP12/8: "Changes to the Training and Competence (TC) Sourcebook"

This consultation paper proposes to add three qualifications to the “appropriate qualification tables” in the Training and Competence (TC) sourcebook extending the list of acceptable qualifications for individuals carry out certain regulated activities, and to amend the details for three qualifications on the “appropriate qualification list” in the same sourcebook.

It will be of interest to firms and individuals who are subject to the TC requirements, including where the FSA’s professionalism requirements under the RDR apply.

Firms are requested to respond by 31 May 2012.


European Commission: Proposal for a General Data Protection Regulation

This Data Protection regulation will not come into force before 2014, but will be the biggest change in data protection law in nearly 20 years. It introduces new rules that will increase the regulatory burden on organisations that handle personal data.

The regulation must first pass through the legislative process in the European Council and Parliament. A regulation (distinct from a directive) is directly binding on Member States and does not require implementation into national law. It will mean a single set of rules across the EU.

Key changes proposed are in the following areas:

  • Right to be forgotten
  • Consent
  • Notification
  • Accountability Measures
  • Breach Notification
  • One-stop shops
  • Data portability
  • Territorial Scope
  • Fines
  • Integration with FSA regulation
  • Statutory liability for data processors
  • Directive on data processing in relation to criminal matters

The document is lengthy, but we recommend that clients make themselves familiar with it, as it will have a fundamental impact on any firms handling personal data, whether acting as data controllers or data processors.

The Information Commissioner’s Office has produced an initial analysis of the proposals. Their paper provides an overview of the most significant parts of the proposed instruments and draws attention to those aspects which it believes still need further consideration. The ICO hopes its views will help to inform the debate and will be of use to all those – in the UK and beyond - with an interest in the successful implementation of next-generation European data protection law. The ICO analysis is contained in the link below.


The full EC proposal can be found in the following link:


FSA publishes Recovery and Resolution Plan update

The FSA has published a feedback statement setting out the approach it is taking to ensure firms develop appropriate recovery plans and resolution packs. It is adamant in its view that banks and investment firms must have definite recovery and resolution plans in place to deal with financial stresses and potential failure. The final rules, which will be applicable to all deposit takers or investment firms with assets over £15bn, are to be published in the autumn.

The update may nevertheless be of wider interest as we anticipate that at least some of the requirements may eventually trickle down to medium-sized or smaller firms.


CP12/9: "Consumer redress scheme in respect of unsuitable advice to invest in Arch cru funds"

FSA has published its above consultation, which is relevant to firms that sold Arch cru funds. Affected firms are all IFAs.

It may be of wider interest as an indication of how the FSA will be moving to handling mis-selling issues in future. The heavily prescribed review process by firms, the provision of an on-line loss calculator, and the level of detail required in advising the outcome to customers are especially interesting.