Money Covered: The Week That Was – 26 April

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

The second episode of Season 3 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 Rachael Healey, George Smith and Rob Morris discussing what impact ESG and AI may have on the financial services sector, in particular Pensions and Accountants.

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

Headline Development

FCA rejects complaints over its handling of the British Steel Pension Scheme scandal

The Financial Conduct Authority (FCA) has dismissed a complaint made on behalf of 354 members in relation to its handling of the British Steel Pension Scheme transfers. 

The complaint alleged that the FCA had been "consistently behind the curve" in responding to the impact BSPS transfers had on members; that it had failed to take steps to protect consumers in accordance with their own operational objectives of consumer protection, despite knowing these were likely to have been mis-sold; that it had not been sufficiently proactive in using its enforcement powers; and that its actions had resulted in inconsistent outcomes for those consumers entitled to compensation.

The FCA has published a redacted version of its final decision letter, dismissing the complaints on the basis that it considers it took appropriate action based upon the information available at the time, in a novel set of circumstances where the timescales were very short. The FCA maintains that the complaints-based approach was appropriate, and that it took steps to provide a sufficient level of security to consumers. Notwithstanding this, the FCA has offered £150 to the complainants, due to their delay in considering the complaint.

To read more, please click here. 

Developments for FCA Regulated Professionals

FCA propose to extend SDR to portfolio managers

On 23 April the Financial Conduct Authority published consultation paper CP24/8 on extending its Sustainability Disclosure Requirements (SDR) and investment labels regime to all forms of portfolio management services.

In November 2023 a substantial package of measures was introduced for fund managers to "improve the trust and transparency of sustainable investment products and minimise greenwashing". The package included an anti-greenwashing rule for all FCA-authorised firms and asset management firms, 4 voluntary investment labels, new rules for firms marketing investment funds based on their sustainability characteristics, and associated disclosure requirements. The regulator is now proposing to extend these measures to portfolio management services to help "ensure that portfolio management offerings that claim to be sustainable investments meet high standards and enhance trust in the market".

The development is an important one for FI insurers for platforms and other discretionary fund management services.  The requirement for fund managers to check carefully the products that they invest in for sustainability arguably introduces increased ESG risks for this sector.

The consultation closes on 14 June 2024 with final rules expected in the second half of 2024. To read the consultation, please click here. 

The FCA reviews good practice and improvement areas for appointed representatives

The FCA has published a webpage assessing the key harms and drivers of harm caused by Appointed Representatives (ARs) and Introducer Appointed Representatives (IARs) who undertake credit broking.

The regulator has stated that it wants to improve principals' oversight of their ARs and has provided examples of good practices and areas for improvement it has seen in principal firms' due diligence checks when appointing ARs and in their ongoing monitoring of ARs. The FCA's findings include the following:

• Initial appointment of ARs: Good practises include having robust procedures, systems and controls to ensure they conduct appropriate due diligence checks on ARs. Areas for improvement include making enquiries with other principals where an AR has been appointed to another principal and not relying solely on automated checks when doing background searches against an AR.
• Ongoing monitoring of ARs: Areas for improvement include principals taking a more proactive approach to identifying harm caused by their ARs and not relying heavily on very limited management information to monitor AR conduct.
• Ending AR relationships: The FCA is concerned that some firms did not check an AR's website after termination to make sure it was no longer listed as an AR of the firm, and some firms were unable to explain their offboarding policy and did not maintain up to date policies and procedures.

The FCA has put an increased focus of a principal's responsibility for their ARs over the last couple of years.  This is an area of interest for all PI underwriters of IFA networks and insurance networks in particular which operate with an AR model.

To read more, click here.

FCA launches criminal proceedings against operator of the 'Kube Trading' scheme 

The FCA has commenced criminal proceedings against Lee Steven Maggs for two fraud offences and contravention of the Financial Services and Markets Act 2000 (FSMA).

Mr Maggs is alleged to have operated an unauthorised investment scheme called 'Kube Trading' which received £2.67m from investors between March 2019 and January 2021. The FCA alleges the scheme involved trading contracts for differences in foreign exchange which is a regulated activity – this gives rise to the FSMA offence, as s. 19 FSMA sets out the 'general prohibition' which prevents a person carrying out regulated activities unless authorised or exempt, and Mr Maggs did not have the relevant permissions. The fraud offences are based on the allegation that Mr Maggs concealed significant losses from investors and misrepresented how the scheme was operated.

The case has been sent to Maidstone Crown Court following Mr Maggs attendance at the Magistrates' Court this week.

To read the FCA' press release please click here. 

FCA issues 'AI Update' 

The FCA has replied to the government's White Paper on regulating the use of AI. The government's White Paper set out five key principles for regulators to interpret and apply to the regulation of AI. These include: (1) Safety, security & robustness, (2) Appropriate transparency and explainability, (3) Fairness, (4) Accountability and governance, and (5) Contestability and redress.

The FCA has set out its plans for the coming year which include:

• Furthering its understanding of AI deployment in UK financial markets;
• Building on its existing foundations – the FCA refers to its existing regulatory framework which covers firms' use of technology including AI;
• Collaboration – the FCA says it will work closely with the Bank of England, Payment Systems Regulator (PSR) and other regulators, but also regulated firms and international peers;
• Testing for beneficial AI – the FCA confirms it intends to deliver ' pilot AI' and 'Digital Hub'. The FCA also notes it runs the 'Digital Sandbox' to test technology via synthetic data. The FCA is considering an 'AI Sandbox'; and
• Conducting research on deepfakes and simulated content following engagement with stakeholders.

To read the FCA's AI Update please click here.

Treasury Committee highlights surge in debanking complaints

The House of Commons Treasury Committee has published a press release about complaints relating to debanking; the process of closing a customer's bank account. As part of its enquiry into SME finance, the Committee sent a letter on 22 March 2024 to the FOS which included a request for information on the number of debanking complaints.  This will be of relevance to FI underwriters.

The Committee has now received a response and highlights the following information about the data provided in their press release: (1) the number of complaints received by the FOS relating to debanking has increased by 69% since 2020/21 (rising from 2281 to 3858 in 2023/24), (2) there has been an increase in the proportion of complaints upheld by FOS (36% in the complainant's favour last year compared with 27% or below in each of the previous 3 years) and (3) the volume of complaints relating to restricted account closures (cases which involved financial crime concerns, money laundering concerns or where the complaint involves a politically exposed person) has almost trebled.

The cause of these increases is not completely clear, but FOS suggest it could be due to changes in banks' processes and behaviours but is also likely to be a result of the media interest in this issue.

To read more, please click here. 

FOS Developments

Securities brokerage fails in Judicial Review against FOS

The High Court has ruled that a claim made by a securities brokerage against the Financial Ombudsman Service (FOS) was not amenable to Judicial Review (JR). 

The Claimant alleged that the FOS had "wrongly threatened" to bring a complaint against it on behalf of the consumer, encouraged the consumer to make a complaint and "doggedly and unreasonably" maintained that it had jurisdiction to deal with the consumer's complaint. The Claimant sought its legal costs of £75,000 plus VAT. The Court found that the claim was not amenable to JR and, even if that were incorrect, refused permission on all five grounds as it was highly likely that the outcome would not have been substantially different, even if the FOS had behaved differently.

To read the High Court's decision in The King (on the application of) iDealing.com Limited v Financial Ombudsman Service Limited [2024] EWHC 847 (Admin), please click here.

FOS writes to FCA to warn of possible gaps in DISP related to the small business jurisdiction

The Chief Executive and Chief Ombudsman of FOS, Abbey Thomas, has sent a letter to the FCA highlighting a number of gaps in the Dispute Resolution: Complaints rules (DISP) in relation to FOS' small business jurisdiction. The gaps identified include:

• Specific Activities: FOS cannot consider cases where it appears something’s gone wrong in a small business’s engagement with a financial firm (e.g. complaints relating to commercial hiring and leasing, peer-to-peer lending between two limited companies, credit brokers selling unregulated loans, and debt factoring and invoice discounting).
• Guarantors: FOS cannot consider complaints from people that have guaranteed a loan to their business. While there are five forms of guaranteed loans that FOS can consider, there is a disconnect as this does not match with all the underlying lending activities that the FOS can consider.
• Individuals who do not qualify as consumers: there are eligibility issues for complainants who don't qualify as a consumer because the complaint is about their business activity, but the business also can’t bring the complaint because either it doesn’t have a relationship with the financial firm on the matter complained about or it hasn’t suffered any harm.
• Requirement to be an enterprise at the point of complaint:  FOS is concerned that businesses lose the ability to bring a complaint in periods when they are not trading, such as when they are winding down. FOS noted that this may be unfair, particularly if the business failure was caused (at least partially) by the actions of the firm they wish to complain about.

To read FOS' letter, please click here. 

Pension Ombudsman Developments

The Pensions Ombudsman (TPO) applies estoppel by representation where member was incorrectly advised regarding survivor's pension rights

In a complaint against the London Pensions Fund Authority (LPFA) and the Local Pensions Partnership (LPP), TPO has ordered the LPFA and LPP to pay the complainant Ms E, the survivor's pensions she and her deceased partner were advised she would be entitled to as well as a £2,000 payment for distress and inconvenience. 

After receiving a terminal diagnosis, Mr N, Ms E's (now deceased) cohabitating/unmarried partner called LPP to enquire whether Ms E would be entitled to any survivor's benefits under the pensions scheme.  Mr N told LPP about his terminal diagnosis and explained that he and Ms E were not married and that he was therefore enquiring about possible survivor's benefits for her.  It was not disputed that LPP unequivocally told Mr N that Ms E would be entitled to survivor's benefits under the scheme. However, this was incorrect.  While a rule change had been implemented in 2008 to allow unmarried partners to qualify for survivor's benefits, the amended rule did not apply to Mr N because he had left employment before 1 April 2008.

Ms E alleged that had Mr N been correctly advised, he would have married her before his death in September 2017 to secure her financial future.

TPO noted that on the facts, Ms E appeared to have made out a case for estoppel by representation and considered the complaint on that basis. Ms E's complaint shared very similar facts to Catchpole v Trustees of the Alitalia Airlines Pension Scheme [2010] EWHC 1809, in which a surviving unmarried partner was also wrongly advised regarding survivor's pension rights and their case succeeded on the basis of estoppel by representation. As TPO is required to follow the law, the Ombudsman likewise found in Ms E's favour based on that case.  

Ms E was able to establish that:

1. LPP had given an unambiguous and unequivocal representation about her right to survivor's benefits;
2. She and Mr N reasonably and in good faith relied on that representation by not getting married; and
3. It would be unconscionable for LPP to be permitted to resile from those representations.

Although TPO acknowledged that LPP had an obligation to follow the applicable scheme rules, which would otherwise have disallowed Ms E from receiving survivor's benefits, in this instance the incorrect information provided amounted to maladministration, and under the circumstances, it was appropriate to remedy the financial injustice suffered by Ms E by ordering that the Respondents pay her the survivor's benefit. They also ordered that Ms E be paid £2,000 on account of sever distress and inconvenience.

To read the full decision, click here.

Developments impacting Accountants

An area impacting accountants (and tax professionals generally) is disguised renumeration – whether payments are subject to income tax.  Two tribunal cases involving appeals of HMRC assessments look at these issues and will be relevant for any insurer involved with these types of issues.

Loans from remuneration trust to director/shareholder were disguised remuneration

The Upper Tribunal (UT) has held that sums paid to a company's sole shareholder and director via contributions to, and loans from, an offshore remuneration trust, in order to avoid tax on earnings and create deductions for the company, were "disguised remuneration" and taxable under Part 7A of ITEPA 2003. The UT found that:

• The First-tier Tribunal (FTT) appropriately applied legal principles in determining that the payments did not constitute general earnings, as they stemmed from the director's shareholding rather than his position as director.
• The FTT was wrong to conclude that employment was a requirement for a reward under Part 7A to be applicable. The test is objective, and captures various arrangements where benefits are provided "in connection with" an employment, rather than solely "from" it. Its scope was wider than the tax charge on general earnings, so was not confined to schemes involving a redirection of earnings. However, a relatively strong or direct nexus between the employment (office) and benefit had to exist. The director's resolutions to make contributions to the trust and loan requests were insufficiently connected to his office to satisfy the test. However, his sole responsibility for the conduct and direction of the company's business resulted in a direct and close connection between the loans and the directorship such that Part 7A applied. As a relevant step occurred between 9 December 2010 and 5 April 2011, the Part 7A anti-forestalling provisions deemed it to occur on 6 April 2012 so HMRC's determination could be increased.
• The contributions were not considered deductible since they were not intended to benefit the company's trade. It was "impossible" to conclude that they were wholly and exclusively for the tax payer's trade simply because they were caught by Part 7A.

To read the UT decision in HMRC v Marlborough DP Ltd [2024] UKUT 98 (TCC), please click here.

HMRC appeal sees IR35 matter remitted back to First Tier Tribunal 

HMRC has had a significant FTT decision remitted back to the FTT by the UT.  

The case concerns income tax and national insurance contributions charged to RALC Consulting Limited (‘RALC’), under HMRC’s ‘intermediaries leg’, commonly known as IR35.  The FTT had, in March 2020, allowed an appeal by RALC against determinations by HMRC to apply IR35 to rules to contracts that the director of RALC, Mr Alcock, had with his clients.  

HMRC appealed the FTT decision to the Upper Tribunal (‘UT’), seeking to argue that IR35 did apply to these contracts. The UT has found that the FTT made several errors in its 2020 findings.  It had erred in law in not properly constructing a hypothetical contract to each of RALC’s engagements with clients and didn’t correctly apply the three stage test from the Atholl House case, which is used to consider hypothetical contracts of employment and where they should fall within IR35.  The UT also considers that the FTT made several errors in the concept of mutuality of obligation. 

The case will now be heard by a new panel at the FTT, with the UT providing some limited guidance for the FTT to consider when making a determination. 

To read the judgment in full, please click here. 

The beginning of the end for UK resident "non-doms"?

As part of the 2024 Spring Budget, the government announced its intention to abolish the tax policy for resident non-UK domiciled individuals (RNDs). In replacement of the current policy, the government is planning to introduce a tax system based on residency which will bring tax rules for RNDs in line with the tax rules for UK registered taxpayers.  

RPC's George Smith and Ben Simmonds have considered the proposed changes, and how these might impact professional advisers. To read their blog, which covers the proposed changes and what reforms might mean, please click here.

Developments for D&O

Derivative actions: Court of Appeal denies shareholders of a non-UK company permission to pursue a derivative claim

In Durnont Enterprises Ltd v Fazita Investment Ltd [2024] EWCA Civ 299, the Court of Appeal recently dismissed the appeal of a shareholder of a Cypriot-based company for permission to continue a derivative action against some defendants. 

The Court of Appeal's decision sets out the legal framework for shareholders of overseas companies to bring a derivative claim, and the approach courts will take when deciding whether to grant permission for derivative actions to be brought by a member of an overseas company. 

A member of a company incorporated outside the UK must apply to the Court for permission to make a claim for the company to be granted a remedy to which it is allegedly entitled. Section 261 of the Companies Act 2006 (CA 2006) sets out a two-stage approach the Court will follow when considering granting permission for derivative claims and section 261(2) states a permission application must be dismissed if it appears that the application and evidence do not disclose a prima facie case for granting permission. In this case, the Court of Appeal upheld the first instance decision that there was no prima facie case for the Claimant's claim, serving as a reminder that demonstrating a prima facie case (under common law principles) constitutes a higher threshold than having a seriously arguable case. 

To read RPC's blog on the case, please click here.

With thanks to this week's contributors: Patrick Barclay, Rebekah Bayliss, Anthony Cutler, Shauna Giddens, Damien O'Malley, Faheem Pervez and Tom Spratley.