The current era of regulatory transition arguably began after the FSA first outlined plans to clamp down on retail investment distribution when it launched its June 2007 discussion paper ‘A Review of Retail Distribution’. But it has been the catastrophic failure of a handful of firms that has played the greatest role in catalysing the current cycle of regulation of UK investment distribution.
Chief among the failures was structured product and life settlement fund provider Keydata. In June 2009 the firm was put into administration by the FSA, when it was discovered the firm had sold non-compliant Isa investments and was unable to meet its tax liabilities.
But the situation at Keydata ran deeper than simple tax liabilities.
By July, the FSA had brought in the Serious Fraud Office to investigate the misappropriation of £103m of assets held by Keydata subsidiary SLS Capital – assets that to date have not been located. The Financial Services Compensation Scheme (FSCS) in November 2011 started compensating SLS’s investors.
In November 2009 another Keydata business, traded life settlement policy fund provider Lifemark, was placed under provisional administration amid a solvency crisis, in part triggered by the collapse of Keydata. By the following February, Lifemark’s bonds were suspended from trading and by September the FSCS announced plans to compensate that firm’s investors.
At the time Keydata’s insolvency was discovered, Arch Cru was also suspended after the financial crisis had raised questions over its speculative investments.
The Keydata crisis affected roughly 30,000 clients who had placed £449m in the firm’s Lifemark and SLS products. The majority of the both firms’ wares were distributed by intermediaries including financial advisers.
The bodies that regulate financial services have since gone into overdrive.
EU regulators clamping down The European Union (EU) continues to amend its Markets in Financial Instruments Directive (Mifid) to achieve harmony of investment practices across the continent, and to enhance investor protection requirements.
The EU has most recently clamped down on exchanged-traded funds (ETFs) – trackers that can be bought and sold as single shares listed on a stock exchange.
The European Securities and Markets Association (Esma) issued ETF guidelines in January 2012, in a consultation that closed at the end of March, focusing particularly on curbing ETFs that purport to be structured as regulated Ucits funds.
The ETF concerns have been supported by the UK’s regulators. In June 2011, FSA director Sheila Nicoll revealed that the UK was working with the EU over restricting ETF sales. FSA asset management sector team manager Tony Hanlon warned in an April 2012 investment conference that many ETFs were being sold with the claim that they comply with the Ucits rules when, in fact, they do not.
Another major European initiative has been the Ucits IV regime, which came into force on July 1 2011. This regime aims to make the process of selling funds across Europe more efficient, but also includes stricter requirements for fund managers including the publication of key investor information documents (Kiids) to simplify fund objectives and attributes for clients. European lawmakers have also launched the Alternative Investment Fund Managers Directive (AIFMD), which focuses mainly on hedge funds and private equity but also counts structures such as funds of funds and investment trusts as under its auspices.
Outside of Europe, the US’s Foreign Account Tax Compliance Act (Fatca) is aimed at preventing investors from evading taxes when holding assets abroad. The act forces non-US firms to gather information about clients to ensure that US investors do not slip through the net.
And the good news?
A series of investment structures and tax schemes are being enhanced by a government that is keen to foster growth.
Investment trusts are benefiting from a modernisation of their tax regime. HM Revenue & Customs in November 2011 announced draft legislation, which came into effect at the start of 2012, enabling shareholders to receive capital profits as dividends. This enables trusts to smooth out the income levels they offer to investors, meaning income can be sustained in years when dividends fall.
John Kenchington is editor of Investment Adviser
REGULATION TIMELINE
June 2007 - FSA launches ‘A Review of Retail Distribution’ discussion paper
September 2010 - FSCS announces compensation for investors in Keydata’s Lifemark life settlement bonds
April 2011 - HM Treasury outlines plans to improve transparency of covered bond market
June 2011 - FSA clamps down on use of terms such as “guaranteed” in structured product promotion
November 2011 - FSCS starts compensating SLS Capital’s investors
November 2011 - HM Revenue & Customs enhances investment trust rules
December 2011 - FSA clamps down on distributor-influenced funds
January 2012 - European Securities and Markets Association issues ETF guidelines
April 2012 - FSA publishes assessing suitability paper clamping down on investment outsourcing solutions
June 2012 - FSA publishes platform consultation paper banning cash rebates to platforms
July 2012 - FSA announces FSCS funding consultation paper proposing to raise investment intermediary levy cap to £150m
August 2012 - FSA consultation paper follows through with plan to ban Ucis sales to retail investor
October 2013 - FSCS funding consultation paper closes
January 2013 - RDR implementation deadline
July 2013 - Alternative Investment Fund Managers Directive comes into force
December 2013 - Platform cash rebate ban comes into force
