Investment Forum Regulatory Update Round 1 - 2017

Learning Objectives Identify the final changes to the capital adequacy requirements that take affect this year Understand the forthcoming EU regulatory directives and their impact within the UK Gain a general awareness of all other regulatory changes and those expected by the FCA

Ongoing Reviews RDR rules state: A firm must not use an adviser charge which is structured to be payable over a period of time unless; The charge is in respect of an ongoing service for the provision of personal recommendation or related services So why remind you of this?

Ongoing Reviews – A Reminder There are 3 reasons why this is relevant: 1. Thematic Reviews (TR) 14/21 & 15/12 2. Positive Compliance – Live & Local 3. Robo-Services

1. Thematic Reviews Expectations Ectations Is the nature of the service clear and relevant to the client. Do these provide a tangible value? Are services delivered as agreed? Does the firm have adequate resource to deliver the agreed level of service? Is the cost of the service specific (in cash terms)? Are client circumstances reviewed and is it evidenced?

Is a suitability report required? The Review Process This should include: Changes in circumstances (health/wealth/job) Changes in goals/needs & objectives Review of the clients ATR and CFL Review of tax/legislative changes Review of the investment portfolio Is a suitability report required?

Suitability Report A report must be provided when recommending the client: Acquire holdings (units) Sell holdings (units) This applies to: Fund switches Rebalancing New definition of advice will include ‘holding existing units’ i.e. to do nothing

SimplyBiz Support - Annual Review New client file document to demonstrate review of client circumstances Pre-investment review letter Post-investment review letter This evidences your process and the review Remember – remind the client of the ongoing cost

2. FCA Positive Compliance Sessions Ongoing services are subject to FCA reviews as part of Thematic work Systems and controls should be in place to ensure they happen at the right time Revisit all key information especially attitude to investment risk Non-engagement with clients……what to consider

Client Non-Engagement What is your process for dealing with clients that do not engage in the review process? For how long would you continue to charge the client? How is this shown in your management information (MI)?

3. Robo Services?

Digitally Assisted Services Bring about further efficiencies into your business You can transact business without the liability of a personal recommendation Save time for both you and your clients

Ongoing Service It does not pay a ‘commission’ but the firm selects their charge As it is not a personal recommendation the adviser charging rules do not apply Where your firm charges an on-going fee consider the service provided. It may be a question for the future!

Consumer Protection on Principles for Businesses (4) ‘A firm must maintain adequate financial resources’ Threshold Conditions (COND 2.4) The matters which are relevant in determining whether a firm has appropriate resources include- (a) the nature and scale of the business carried on, or to be carried on; (b) the risks to the continuity of the services provided by, or to be provided

Capital Adequacy Changes From 30th June 2017 minimum capital requirement increase to: £20,000 Or if higher: 5% of investment income plus 2.5% of any mortgage and insurance income Investment income - £300,000 x5% = £15,000 Mortgage & Insurance income - £300,000 x2.5% = £7,500 Capital Adequacy = £22,500

Subordinated Loans At the same time the subordinated loan restriction takes effect This restricts subordinated loan to 400% of capital and reserves, less goodwill Any excess in the subordinated loan is used as a liability in the ‘own funds’ calculation

Subordinated Loan Example 1 Capital adequacy is £20,000 Subordinated loan of £20,000 with no goodwill Capital and Reserves - £5,000 £5,000 x 400% = £20,000 (no sub loan liability) C&Rs plus Sub Loan (£5,000 + £20,000) = Own funds £25,000

Subordinated Loan Example 2 Capital adequacy is £20,000 Subordinated loan of £20,000 with no goodwill Capital and Reserves - £4,000 £4,000 x 400% = £16,000 (£4,000 sub loan liability) C&Rs plus Sub Loan (£4,000 + £20,000 - £4,000) = Own funds £20,000

Subordinated Loan Example 3 Capital adequacy is £20,000 Subordinated loan of £20,000 with no goodwill Capital and Reserves - £3,000 £3,000 x 400% = £12,000 (£8,000 sub loan liability) C&Rs plus Sub Loan (£3,000 + £20,000 - £8,000) = Own funds £15,000

Goodwill Remember goodwill is taken from capital and reserves If goodwill is greater than capital and reserves the firm will not be able to meet its ‘own funds’ Consider removing the goodwill from the regulated firm Speak to your accountant!

Subordinated Loans / Action Review your financial position at the earliest time possible Refer to C&TT 187 Where action is needed seek advice from your accountant For any further support please contact our compliance helpdesk

The FSCS Funding of the scheme was last reviewed in 2013 by FSA Is it still working well for consumers? Is it still working well for the firms that have to contribute? We are now having a further review We have FAMR to thank for this

The FSCS Why is it not working? PII market is not competitive but cover is mandatory PI cover has many limitations when liabilities arise Disproportionate cost of protecting UCISs High cost of funding and unpredictability of levies Outcomes by The Ombudsman

FSCS – The Proposals Review the PII conditions of cover Introduce product provider contributions Have one class of intermediation for all activities Move to risk-based levies Uplift levels of cover for consumers Build up a buffer to smooth the effects of funding

What next? Your Feedback Do you think PII works and if not what would you change? Do you think the current FSCS funding system works and if not……? Is there anything else you would like us to consider? Consultation closes on 31/03/2017 Please be patient! Further consultation in 2018 Send us your feedback to C&TT 185

Notification to HMRC of offshore assets and income Do any of your clients hold overseas assets or receive income? You must notify them of their requirement to declare this to HMRC Send them the HMRC notice with a covering letter containing prescribed text See C&TT 186 for the notice and wording

Which clients to notify Those clients you have dealt with throughout the year to 30/09/2016 And where you expect there to be a future relationship Clients must be notified by 31st August 2017 Failure to take action could result in a fine of £3,000

Looking ahead Q1 – CP on Insurance Distribution Directive Q1 – CP on redress for pension transfers Q2 – Exam standards Q2 – MiFID II rules

Learning Objectives Identify the final changes to the capital adequacy requirements that take affect this year Understand the forthcoming EU regulatory directives and their impact within the UK Gain a general awareness of all other regulatory changes and those expected by the FCA