Money Covered: The Week that Was - 07 July

Welcome to The Week That Was, a round-up of key events in the financial services sector over the last seven days.

Season 2, Episode 5 of our podcast, Money Covered - The Month That Was, where the team discusses key developments and topical issues in the financial services area, is now available. This episode features David Allinson and Ash Daniells discussing claims which involve Equity Release Products.

To listen to this and all previous episodes, please click here.

FCA & FOS Developments

FCA warns asset managers over liquidity management

The Financial Conduct Authority (FCA) has warned asset managers that current liquidity management procedures pose a risk and urged for an increased focus on this area in order to hedge againstnvestor harm. This is of increasing importance given that the global financial situation could lead to large scale redemption requests.

Following a recent review, the FCA has said that, whilst some firms can demonstrate compliance with regulatory standards and expertise in liquidity risk management, there is a 'wide disparity' in quality. The FCA noted that, despite the tools for effective liquidity management generally being in place, some firms lacked an adequate framework to manage risks and good practises were not embedded into daily activities.

A spokesperson for the FCA stated that the review "should serve as a warning to all asset managers that they need to get this right" and reaffirmed that the FCA expects firms discuss the findings in the review and ensure that they are not amongst those firms that have not met the standards required to effectively manage liquidity risks.

To read more, please click here.

FCA data shows that fewer retirees are taking regulated advice

An analysis by Just Group has identified a decrease in the number of retirees taking regulated advice before accessing their pensions.  

Just Group found that of the 267,204 decumulation products sold in 2022, just over 41% were sold without regulated advice having been given.  In 2018, the figure was 34%.  Just Group's communication director, Stephen Lowe, said that the trend is concerning: “We are now eight years on from the ‘freedom and choice’ reforms and use of the professional help available – either advice or guidance – is slowly but surely slipping away, even though we know the average value of pensions used to buy annuities and drawdown has been increasing."

The flexibility introduced by Pension Freedoms has always caused some concern, as retirees risk withdrawing funds  an unsustainable rate. Choosing when and how to access income in retirement is complex and the trend away from regulated advice could result in more people making uninformed decisions and running into difficulties with their pensions. 

To read more, please click here.

Adviser banned by FCA after British Steel advice

The FCA has banned a financial adviser who gave unsuitable advice to defined benefit (DB) pension scheme members.

Mr Steel (a co-director of Estate Matters Financial Ltd (EMF)) advised 483 customers to transfer out of their DB pension schemes, with the total transfer value coming to £140 million. The FCA held that 86% of the advice failed to achieve the required suitability standard, noting in particular Mr Steel's failure to request the correct information and/or disclose the risks of transferring. Mr Steele was also found to have sold his client book to himself for significantly less than its market value, leading the FCA to determine that he had acted without honesty and integrity.

The FCA imposed a fine of £3,694,400 on Mr Steel but agreed not to enforce this provided Mr Steel paid £850,000 to the FSCS, with this sum representing the bulk of his remaining assets. The FCA stated that the settlement avoided a situation where the remaining assets would be exhaustaed by High Court proceedings rather than on compensating consumers. To date, the FSCS has paid out £1,752,125 to clients who received unsuitable advice from EMF.

To read more, please click here.

FCA confirms investigations into Crispin Odey and Odey Asset Management

In a letter responding to the Treasury Committee, the FCA has confirmed that it has ongoing investigations into whether Crispin Odey was a "fit and proper person to working in financial services" and whether or not he has failed to comply with the FCA rules on integrity, due skill, care and diligence.
The letter defends the FCA's intensive oversight of Odey Asset Management, having previously declined to provide any public statements on the ongoing investigations of widespread sexual misconduct by Crispin Odey. To date Mr Odey he has denied all allegations, however the allegations have prompted key banks to sever ties with Odey Asset Management and the partners at the firm have ousted their founder. He has also been removed from the FCA's register of people approved for work in the financial services sector and could face a further ban should the FCA make an adverse finding against him.

The  FCA has only provided limited details around the investigation, with further information expected as the situation develops. The FCA has confirmed, however, that details will be limited as they continue to liaise with the police, with criminal prosecutions expected to progress.

To read the FCA's response in full, please click here.

FCA publishes letter to cryptoasset firms setting new rules on promotions

The FCA has published a letter warning crypoasset firms that they must get ready for changes to the financial promotions regime that will come into force on 8 October 2023.

The letter confirms there will be four routes through which firms will be able to lawfully communicate crpytoasset promotions to UK consumers. Such a promotion will be lawful if:

• The promotion is communicated by an authorised person.
• The promotion is made by an unauthorised person but approved by an authorised person.
• The promotion is communicated by a cryptoasset business registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).
• The promotion otherwise complies with the conditions of an exemption in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“the Financial Promotion Order").

The letter confirms that failure to comply will be a breach of section 21 of the Financial Services and Markets Act 2000, which is a criminal offence punishable by up to 2 years imprisonment, an unlimited fine, or both.

The FCA expects the main way cryptosystem businesses will be able to make promotions to UK consumers will be by registering with the FCA under the MLRs.

To read the FCA's letter, please click here.

FCA widens access to long term asset funds

Long Term Asset Funds (LTAFs) are a type of open-ended authorised fund designed to invest efficiently in long term, non-liquid assets, such as venture capital, private equity, private debt and real estate. They are a higher risk product that can provide greater diversification to investment portfolios in exchange for potentially higher returns but less immediate liquidity and longer redemption periods.

To help protect consumers, LTAFs will be subject to additional protections under the FCA's high risk investment framework, with requirements to include risk warnings to be given focusing on liquidity and appropriateness assessments to be completed for retail customers.

The FCA also intends to extend the potential distribution of LTAFs for Defined Contribution (DC) pension schemes. On 29 June 2023, the FCA published its rules to extend access to LTAFs to a wider range of DC pension scheme members as well as retail investors. The key points from the extension to the rules are that:

• LTAFs can now be offered to scheme members of an auto-enrolment (AE) qualifying scheme as a self-select option outside of designated default arrangements and also to members of non AE schemes;
• The exposure limit forinvestors in AE schemes is set at the higher of 10% of the members pension within that scheme, or the exposure deemed appropriate within the default arrangement of the same qualifying scheme. For members of non AE qualifying schemes the exposure limit is 10% of the members pension value within that scheme; and
• There is an expectation (although the FCA have explicitly said this is not a rule) that self-select members, and not default investors, should receive a notification alerting them to the liquid nature of their holdings as they approach retirement age.

On the retail side, the FCA is changing the distribution categorisation of the LTAF to become a Restricted Mass Market Investment. This means that LTAFs can be promoted to mass market retail investors but specified risk warnings must be provided.

The rules came into force on 3 July 2023. There is a transitional period of one year from that point for LTAFs that are already authorised to make the required changes.

To read more, please click here.

How are FOS preparing for the Consumer Duty Countdown?

There is less than a month until the implementation of the Consumer duty for new or existing products. The Duty will inform how FOS decides complaints and they have been busy discussing this with trade bodies, businesses and consumer groups.

The FOS notes that the Duty is underpinned by concepts of fairness and reasonableness, and goes on to note that this  is similar to the fair and reasonable jurisdiction under which they already operate. Perhaps this means that we won't see a significant change in how FOS decides complaints following implementation on 31 July. However, given that the duty doesn’t have retrospective effect, it might take some time before we see any final decisions demonstrating how FOS intends to apply this in practice.

The FOS acknowledges the Consumer Duty is a significant consideration for businesses and they will continue to speak to firms once the Duty comes into force in order to understand what types of complaints they are facing and how they are responding to these.

To read more, please click here. 

HMRC Updates

Increase in HMRC interest rates

HMRC has confirmed increases to the interest charged on late payment of tax, along with the rate of interest payable by HMRC on overpaid tax. This was expected, as the Revenue's rates are linked to the Bank of England base rate (which now sits at 5%, up from 4.5%).

HMRC's rates will increase as follows:

• Interest for unpaid instalments of corporation tax liabilities (calculated as base rate plus 1%) will increase to 6% from 3 July 2023.
• Interest for the late payment of other taxes (calculated as base rate plus 2.5%) will increase to 7.5% from 11 July 2023; and
• Interest paid by HMRC on the overpayment of tax (calculated as base rate minus 1%) will increase to 4% on 11 July 2023.

To read more, please click here.

Other Developments

Regulators recommend redemption fees for property funds

The Financial Stability Board (FSB) and International Organization of Securities Commissions (IOSC) have recommended the introduction of redemption fees for investors wishing to sell their stakes in open-ended property funds. The recommendation is part of a wider consultation aimed at addressing the structural vulnerabilities of property asset management activities.

Significant issues arose during the pandemic due to investors rushing to sell their positions in such funds, causing a mismatch between the speed of redemption and the time taken to sell the underlying illiquid assets. Therefore, the regulators have opened a consultation to address the structural issues and strengthen the stability of the sector. Other potential solutions included swing pricing, which involves adjusting a fund’s net asset value in either direction to reflect the cost of an investor buying or selling, and/or adding or subtracting a variable levy from the fund’s NAV to decrease the price for subscriptions and passing on the liquidity cost to redeemers.

The deadline for responding to the consultation is 4 September 2023, and the FSB intend to publish the report in late 2023.

To read more, please click here.

Treasury Committee requests information about banks' savings rates and consumer duty

The House of Commons Treasury Committee has published a letter to the FCA regarding banks' savings rates, raising concerns about rates being too low.

The committee's focus is on competition in the banking market, with criticism being aimed at banks for the delay and extent to which  benefits are passed onto customers following increases in the base rate.

The Committee highlighted that savings rates remain too low, and has requested examples of where a bank has changed its rates as a result of a challenge from the FCA. It also requested clarity on how the Consumer Duty will help the FCA in ensuring savings rates offer fair value and how fair value will be determined. It remains to be seen what supervisory or enforcement action can be used against firms that do not set rates at fair value, and how the FCA will check if banks are making enough effort to encourage customers to switch to higher rate products.

The committee has also sent correspondence to the chief executives of the largest banks asking if current saving rates provide fair value. A response has been requested by 17 July, whilst a response from the FCA is requested by 14 July 2023.

To read more, please click here.