RegulationJul 10 2015

Budget business and more regulation: This week’s key themes

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Budget business and more regulation: This week’s key themes

Whenever George Osborne gets his red lunchbox out, the week’s key themes are always going to be a bit skewed towards what was contained within, but other interesting things also occurred during the last five days.

As is traditional, all of the exciting developments of the week will now be condensed into a couple of action-packed pages for your reading pleasure:

1. Budget basics.

While many headlines focused on the chancellor’s raid on Labour election policies - the living wage, non-doms and buy-to-let taxation - FTAdviser dug into the actual Budget document to unearth policy changes more relevant to our industry.

These included the potential for “further radical change” on the way pensions are taxed, a limit on the amount higher earners (raking in more than £150,000 a year) can pay tax-free into a pension, confirmation of both the annual investment allowance at £200,000 from January 2016 and the £1m inheritance tax threshold, along with new rules on how venture capital schemes can invest. Expect an overhaul of VCTs if the rules get signed off.

2. Dividend meddling.

Seemingly from our site traffic, the announcement that got the most attention was around changes being made to the way dividends are taxed.

Mr Osborne said the existing system is “complex and archaic”, designed to offset double taxation on profits. So from April next year, the dividend tax credit will be scrapped and replaced with a £5,000 tax-free allowance.

“Those who either pay themselves in dividends or have large shareholdings worth typically over £140,000 will pay more tax,” he stated, adding that at the same time more than a million people will see their tax cut.

The Treasury expects the changes to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities, with their analysis showing this will reduce the cost to the exchequer of future tax motivated incorporation by £500m a year from 2019 to 2020.

3. Insistent clients again.

Earlier in the week, the issue of clients that don’t heed adviser risk warnings - usually with pension transfers - inevitably came up when the Association of Professional Financial Advisers’ put a bunch of its members in a room with the regulator’s Rory Percival and a representative of the ombudsman.

Both of them agreed that the best course of action was to give the same quality advice as usual, but when a client decided to push ahead with what they want to do rather than what is recommended, make them sign a document specifying the decision in their own words.

The following day, the FCA’s director of supervision Tracey McDermott wrote a ‘dear CEO’ letter to providers, requesting information on a variety of pension freedom areas, including their treatment of insistent clients.

4. MMR reviewed.

While politicians were stealing the limelight, regulators were still beavering away in the background, publishing papers at a rate that would have you forget it is summer outside.

To help cure Budget fever, yesterday (9 July) the Financial Conduct Authority published its first of several reviews into how the Mortgage Market Review is bedding in.

Thankfully they found no evidence of systemic customer detriment, but did find from mystery shopping research that the basis for 38 per cent of adviser mortgage recommendations was unclear.

While some were still finding the right balance, the regulator called out those that have followed the letter of the law too strictly, resulting in “lengthy, stilted and repetitive conversations with consumers”, while others “delivered advice with little or no structure, resulting in inconsistent quality of advice and a higher chance of unsuitable recommendations”.

Other findings included the fact that many consumers hindered the process by coming to advisers pre-loaded with product biases, while many clients are still none the wiser as to whether conversations actually constitute advice; with the FCA not willing to be any more prescriptive on how to tackle this.

5. Approving persons.

Finally, on the City watchdog’s agenda at the beginning of July, was whether to make wider changes to the approved persons regime once the new accountability regime is in place for banks.

Final rules, published on Tuesday, explained that feedback to the consultation paper warned the rules may cause a two-tier system between those financial advisers who are subject to the new regime because they are employed by banks and those who remain subject to the ‘approved persons regime’ because they work for financial advisers.

As is his wont, the watchdog’s watchdog Andrew Tyrie proclaimed that regulators must avoid falling back into the “box-ticking” approach that characterised the “discredited” approved persons regime.

Some things never change.

peter.walker@ft.com