Your IndustrySep 13 2018

What incoming regulation should advisers look out for?

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What incoming regulation should advisers look out for?

Now that Mifid II and General Data Protection Regulation (GDPR) have started to bed in, the industry is beginning to look seriously at what the Senior Managers and Certification Regime (SMCR) will mean for it. For solo-regulated firms, such as financial advisers, it is due to kick in on 9 December 2019.

The Financial Conduct Authority (FCA) has said firms should focus on getting clarity on responsibilities and driving high and consistent standards of behaviour across all staff who operate in financial services.

In an information video, David Blunt, head of conduct specialists at the FCA, says: “The SMCR replaces the approved persons regime. This represents a shift in our focus, increasingly looking at individuals as well as firms.”

Adviser action

The steps firms will need to take to prepare will vary by firm. It is affected by the size and complexity of the business, as well as how clear the reporting line, accountability and governance structure is.

The three components of the regime are:

  • Conduct Rules
  • Senior Managers Regime
  • Certification Regime.

The question that firms need to be asking themselves is whether their staff know enough to do their job: from the most junior person to the most senior.

Also, firms need to explain practically what the three components mean for staff and explain how they should follow them.

[The SMCR] regime is expected to have a relatively greater impact on larger and/or more complex [advice] firms.--Keith Maner

There will also be an annual check in relation to individuals with significant roles, whose actions can have a significant impact on the company. This will ensure the people in these roles are fit and proper to do the job they are doing.

The most senior people at firms, like the chief executive, who already comes under the approved persons regime will be under greater scrutiny from the FCA.

According to Chris Egbunike, managing consultant at Bovill, there is an acceptance among asset management firms that they have to start the process of reviewing who is responsible for what and how the accountability will be documented.

Mr Egbunike says: “It is definitely, for us, the biggest regulatory issue on most asset managers’ minds. It is also fair to say, a lot of them are compliance punch drunk.

“Between GDPR, Mifid II, the Alternative Investment Fund Managers Directive (AIFMD), most firms within the fund management space are pretty tired.”

Keith Maner, head of compliance at Thistle Initiatives says: “We expect 2019 to be dominated by the extension to all firms. This regime is expected to have a relatively greater impact on larger and/or more complex [advice] firms and to affect smaller ones less and appointed representatives not at all, since they are out of scope.”

SMCR is not the only thing that firms will have to worry about in 2019.

Mortgages

For mortgage brokers, who are not immune from the impact of the SMCR, there have been a number of specific developments in the mortgage sector.

In the interim report of the FCA’s Mortgage Market Study which came out in May 2018, the regulator says: “We believe the market could work better in a number of ways, while preserving important regulatory protections where these are needed.”

To help achieve its vision, the FCA wants:

a.  The process of finding the right mortgage to be easier for consumers.

b.  A wider range of tools providing consumers with a choice about the support (including advice) that they receive.

c.  Consumers choosing an intermediary to be able to do so on an informed basis. 

d.  Consumers to be able to switch more freely to new deals without undue barriers.

Also, the FCA published early in 2018 a 'Dear CEO' letter asking the chief executives of firms that enter into regulated second charge mortgage contracts to review their firm’s mortgage lending processes and to confirm to the regulator, by 1 May 2018, that the firm was lending responsibly and that its processes, systems and controls ensured this.

Mr Maner points out: “During this review, the FCA identified significant concerns and found a number of poor practices that led it to conclude that second charge lenders might not always be lending responsibly, leading to potential customer harm.

“The Dear CEO letter described failings in the following areas: overall affordability assessment, income assessment, expenditure assessment, oversight arrangements and financial crime."

Pensions

In the pensions space, the FCA wants to ensure that regulation provides the appropriate level of consumer protection and competition, whether this is through the establishment of independent governance committees or ongoing work, such as the Retirement Outcomes Review.

As part of ongoing efforts to ensure the sector works well for consumers and workplace pension savers, the FCA is working on a pensions strategy, collaborating with The Pensions Regulator (the TPR) on a strategic approach which will set out how the FCA and the TPR will work together to tackle the key risks facing the pensions sector over the next five to 10 years.

The initial stage involved a 'Call for Input', which has now closed.

The FCA has also published new rules and guidance on pension transfer advice and is seeking views on additional changes, including adviser charging structures - in particular whether it should ban contingent fees for pension transfer advice.

The regulator says: “The new rules and areas for discussion aim to improve the quality of pension transfer advice to help consumers make informed decisions for their individual circumstances. We have kept the position that an adviser should start from the assumption that a DB pension transfer will be unsuitable.”

Thematic review of non-advised drawdown

The FCA has published a thematic review on non-advised drawdown. It assesses whether firms are providing necessary information at the right time and in a way that helps customers make informed decisions when accessing retirement benefits – as well as when reviewing whether their drawdown pension still meets their needs.

It found firms were broadly meeting their obligations to communicate clearly with customers but added that there was a risk of harm from customers not fully engaging with the information. The findings are closely aligned to the interim findings of its Retirement Outcomes Review and will inform the final report.

Investments

In investments, following the recent FCA Asset Management Market Study, Mr Maner says he expects:

  • Greater regulatory scrutiny of asset managers, with particular emphasis on remedies to better protect investors from the results of weak competition;
  • Clear and simple information about the costs investors pay for asset management services;
  • The importance of funds having clear objectives and the use of investment platforms - this is currently the subject of a separate market study.

As Mr Maner notes: “Certain firms have been selected to respond to an online FCA questionnaire regarding market abuse controls in the asset management sector.

“This questionnaire is part of a market-based review by supervisors in the FCA's Asset Management Department and it looks at how asset management firms identify and control the risks of insider dealing, improper disclosure and market manipulation, including their consideration of reporting suspicious market activity where appropriate.

He adds: “Brexit is a key issue for fund managers making use of outward passporting, the availability of which looks certain to be lost after next March.

"Many managers have already implemented moves to other locations that will remain within the EU, such as Luxembourg and Dublin.”

ima.jacksonobot@ft.com