In this Update we take a look at regulatory developments over the past quarter.
Consumer Duty final rules and guidance
On 27 July 2022 the FCA published its final rules and guidance on the new Consumer Duty. The implementation timetable has been pushed back from that set out in the original consultation proposals, but firms are required to have an implementation plan in place by the end of October this year.
Application across the distribution chain
One particular area of concern for firms is the application of the Consumer Duty across the distribution chain, with a number of respondents to the consultation querying how this would work. The FCA final rules retain the principle that the Duty applies to a firm that can materially influence customer outcomes even where that firm has no direct relationship with the end customer. However, the FCA has introduced additional guidance to clarify its expectations of parties in the distribution chain. The guidance confirms that, unless regulatory requirements or contracts require it, firms do not need to oversee the actions of other firms in the distribution chain. The FCA has introduced a rule requiring firms to notify the FCA if they become aware that another firm in the distribution chain is not complying with the Duty.
The FCA expects product manufacturers to have completed necessary reviews to meet the outcomes rules for their existing open products by the end of April 2023 so that they can share with distributors the information required for distributors to meet their obligations under the Duty.
Application of Consumer Duty where there is an IGC or GAA
Some respondents to the consultation pointed out that value for money rules in the FCA's Conduct of Business Sourcebook in relation to group personal pension schemes and investment pathways focus on the role of Independent Governance Committes (IGCs) or Governance Advisory Arrangements (GAAs). This could give rise to issues if IGCs and GAAs assessed value for money in a different way to a firm's assessment under the Duty. In response the FCA has changed its rules so that firms must use assessments carried out by their IGCs/GAAs to assess whether their products provide fair value.
Sales of product books
The FCA is introducing new rules for sales of product books after 31 July 2023. The rules are drafted in broad terms to cover sales and purchases of product books generally and will therefore apply to the sale and purchase of SIPP back books. The seller will be required to provide "relevant information" to enable the purchaser to comply with the Duty from the date of purchase. The rules will also specifically require the purchaser to comply with the Duty in respect of the product book. The rules specify that the purchaser must carry out sufficient due diligence to ensure it understands various matters relating to the product, eg:
- whether the retail customers of the product have "characteristics of vulnerability";
- the outcome of the seller's product review and approval process carried out to comply with the Duty;
- the costs paid by the retail customer for the product; and
- the basis on which the product has been assessed as providing fair value.
Timing and next steps
By the end of October 2022, a firm's board must have approved its implementation plan.
By the end of April 2023, "manufacturers" of products are expected to have completed all reviews necessary to meeting the "outcome rules" for their existing open products so that they can share necessary information with distributors.
For new products and existing products that are available to new customers, the rules come into force on 31 July 2023.
For "closed book" products, the rules come into force on 31 July 2024.
For more detail on the final rules and guidance, see the Update produced by our Financial Regulation team. (For a summary of the basics in relation to the Consumer Duty and our thoughts on the application of the Consumer Duty specifically in relation to SIPPs, see our February Update.)
The application of the Consumer Duty to legacy products is a particular issue for SIPP providers who have purchased back books from other providers, so the fact that the implementation date has been put back to 31 July 2024 for closed book products will be a welcome relief for many SIPP providers. Nevertheless, the end of October 2022 deadline for implementation plans means that SIPP providers still face a challenging imminent deadline. The new rules on sale and purchase of back books underline that Consumer Duty compliance will be a key issue for due diligence.
Consultation on broadening retail access to long-term asset funds
FCA to review boundary between advice and guidance
According to widespread reports in the pensions press, the FCA has announced that it is looking at transforming the rules on advice and guidance. Under current rules firms may be wary of providing any form of tailored guidance to consumers for fear that they will be accused of providing advice without the necessary FCA authorisation or without having carried out required analysis of the customer's financial situation. The upshot of this can be that customers unable to pay for financial advice find it difficult to find guidance that is in any way tailored to their situation.
- Financial Ombudsman Service
FOS highlights its approach to complaints involving UCIS
In its latest edition of Ombudsman News the Financial Ombudsman Service (FOS) sets out its approach to dealing with complaints involving unregulated collective investment schemes (UCIS). FOS highlights that the FCA considers UCIS unsuitable for most retail clients because of their high risk nature, and that UCIS can generally only be promoted to a select group of individuals, eg certified high net worth individuals. Even then, the FCA has indicated that UCIS should not make up more than 5% of the investor's portfolio.
Many FOS complaints involve UCIS investments made via a SIPP, with the member complaining about the suitability of advice received and/or that the SIPP provider failed to carry out adequate due diligence checks before allowing UCIS investments to be held within a SIPP. FOS flags that even though UCIS themselves are unregulated, advising on or arranging an investment in UCIS may itself be a regulated activity.
FOS flags that the FCA has stated that financial advisers cannot assess the suitability of a pension transfer without taking into account the overall investment strategy. FOS's position is therefore that advisers need to consider the suitability of UCIS as investments if advising on a pension transfer that is intended to facilitate investment in UCIS.
In a previous determination in which it upheld a complaint against a SIPP provider, FOS has said that whilst dealing with a regulated financial adviser should offer reassurance that regulatory rules are being complied with, "…it doesn't follow that faith can be blind and nothing further needs to be checked – especially if there are warning signs that things are not as they should be". SIPP providers are particularly at risk of complaints where the financial adviser that gave the transfer advice has since become insolvent. SIPP providers should make sure they have appropriate procedures in place to identify instances where there are warning signs that a member's request to invest in a UCIS may be based on inadequate or inappropriate advice.
- Pensions dashboards
Latest pensions dashboards developments
In our February Update we reported on the FCA's proposed rules requiring FCA-regulated pension schemes to connect to the pensions dashboards service. Since then there have been a number of dashboards-related developments. These include:
- a consultation on the Dashboards Available Point (ie the point at which dashboards become accessible to the public). This does specify a date, but proposes a requirement that the Government must give at least 90 days' notice before dashboards are made available to the general public;
- a Bill to prohibit trustees from being indemnified from scheme funds for breaches of the dashboards legislation;
- a consultation by the Pensions Dashboards Programme on the standards underpinning pensions dashboards;
- PASA guidance on validating the accuracy of member data; and
- updated PASA guidance on using scheme data to match dashboard "find requests" by members with relevant records.
The FCA has not yet responded to its dashboards consultation in which it proposed that providers of personal pension schemes should generally be required to connect the dashboard by 30 June 2023. However, it is notable that the date of 30 June 2023 was intended to be the same as the deadline for master trusts with 20,000 or more relevant members proposed by the DWP in its dashboards consultation relating to occupational pension schemes. The DWP's consultation response has since announced that the staging date for master trusts with 20,000 or more relevant members will be 31 August 2023 instead of 30 June 2023.
- Pensions Regulator
Regulator publishes strategy to combat pension scams
The Pensions Regulator has published its strategy to combat pension scams. The strategy includes:
- encouraging the pensions industry to use anti-scam messaging on all annual benefit statements and "touchpoints" that savers have with their provider;
- a review of guidance on member communications for scam prevention messaging;
- encouraging the pensions industry to report fraud and criminality to Action Fraud;
- engaging in an 18 month review of Pension Schemes Act 2021 regulations to improve legislation where possible.
"Well-designed performance fees" to be removed from charge cap
As part of its "Growth Plan 2022" announcements, the Government announced that it will bring forward draft regulations to remove "well-designed performance fees" from the occupational defined contribution pension charge cap. The announcement did not make reference to personal pension schemes.
Income tax changes and transitional period for Relief at Source reduction
As part of its "Growth Plan 2022" the Government announced that the reduction to the basic rate of income tax from 20% to 19% will take effect from April 2023, one year earlier than previously planned. It announced that there will be a one year transitional period for Relief at Source pension schemes to permit them to continue to claim tax relief at 20%.
New requirements in force for overseas entities holding real estate
In our last Update we reported on the Economic Crime (Transparency and Enforcement) Act 2022 which generally requires overseas entities (OE) to register on the new OE register maintained by Companies House before they can be registered at HM Land Registry as the owner of property. The new registration requirements came into force on 5 September 2022.
Additional trust registration requirements effective from 1 September 2022
From 1 September 2022 trustees of almost all UK express trusts have been required to register with HMRC's Trust Registration Service (TRS) unless an exemption applies. Registrable trusts created in future will generally need to be registered within 90 days of the trust being set up. Pension schemes that are registered pension schemes under the Finance Act 2004 are not required to register with the TRS. However, express trusts are created under English law in many different common scenarios, so pension providers should be alert to other arrangements which may give rise to a registrable trust. For example, it is common for partnership property to be held on express trusts, and such trusts will be subject to the registration obligation unless an exemption applies.