January 2013 Update

9th January 2013

Here is the latest round of regulatory developments for January 2013:

FSA consults on plans for temporary product intervention rules                                                                               While it is difficult to foresee a situation where the FCA would get directly involved in products that a firm might sell at some point in the future, it is worth being aware that the FSA is consulting on the approach the future Financial Conduct Authority (FCA) would take if it needed to exercise powers to make temporary rule changes, before consultation, relating to financial services products.

The Financial Services Bill specifically includes this power as part of the FCA’s toolkit. The FSA is consulting on its successor body’s behalf so that the FCA’s approach is clear and understood by April 2013 when the new regulator comes into being.  Rules made before consultation would last for no longer than twelve months and could not be renewed. During this time, the FCA will either consult on a permanent remedy or aim to resolve the problem another way.
The consultation outlines some instances which may trigger temporary rules being made, including:

• Where a product is in serious danger of being sold to the wrong customers, for instance where complex or niche products are sold to the mass market; 
• Where a non-essential feature of a product seems to be causing serious problems for consumers;
• Where a product is inherently flawed.

Product intervention rules (temporary or not) may address a wide range of product-related issues, for instance by restricting the marketing of a product to only certain types of customer or by requiring a product feature to be removed or changed in some way.  Where there is high risk to consumers, FCA might make a rule change to ban a product but it would only do so in very serious circumstances. Other possible interventions, which would not necessarily require changes to rules, would include issuing warnings, or using supervisory powers to require firms to amend promotional materials.

Martin Wheatley, managing director of the FSA and CEO-designate of the FCA, said:

“Making temporary product intervention rules is not something that we expect to do often but having this power means we can act quickly and decisively.
“The use of the power will be a judgement based on the need to protect all market users, consumers and industry innovators alike, from the type of products which will cause harm and might generate compensation costs.”


Conflicts of Interest
This is an area that has had some exposure over the last month and some insight into the FSA’s expectations around conflicts of interest:

Why do conflicts of interest matter in our area?
Investment managers, asset managers, corporate finance advisory houses, all act as agents for their customers, making investment decisions in financial markets on their behalf or bringing investment opportunities to their attention. Confidence in the integrity of firms when acting on behalf of customers is central to the relationship of trust between the industry and its customers.

This means that when making investment decisions or providing services or investment opportunities for customers, firms in our sector must always act in customers’ best interests and put customers’ interests ahead of their own and treat all their customers fairly. Acting as an agent for customers may create conflicts between the interests of a firm and its customers or between the interests of different customers. Policies to properly manage conflicts of interest mean customers avoid unnecessary costs and have fair access to all suitable investment opportunities. Properly managing conflicts improves the returns earned by customers and enhances general confidence.

FSA’s expectations
Principle 8 of FSA’s Principles for Businesses requires that firms must manage conflicts of interest fairly, both between itself and its customers and between a customer and another customer. SYSC 4 and SYSC 10 require the boards or partners at firms to establish effective frameworks to identify, control and review conflicts of interest. The Conduct of Business Sourcebook (COBS) contains detailed rules governing the purchase of goods and services using customers’ money and the allocation of investment opportunities between customers.

FSA expect firms to demonstrate that these principles and rules are embedded in their businesses and that they are taken into account when considering new products, processes or business models. FSA expect firms to regularly review their practices to ensure compliance with these requirements.

The Future – FCA and Challenging Market Behaviour
Back on the 04 Dec 2012 Jamie Syminton Head of Wholesale Enforcement at FSA, gave a speech to the City and Financial Market Abuse Conference, London, a summary of which is worth FIRMS being aware of:

The FSA strategy for tackling market abuse relies in a large part on the credible deterrence agenda and has done for some years now.   FSA will not be afraid to take firm disciplinary action – including prosecution where appropriate – when they detect market abuse.

But the front line in the battle against market abuse is the industry itself.  FSA have expectations on firms and individuals, clearly set out, to take action that will prevent market abuse and help to police it, in the hope that market practitioners will do so voluntarily, because it is in the wider best interests of all market participants that market abuse is minimised.  But where the regulator see firms or individuals failing in breach of their duties to prevent or police market abuse, then they will not be afraid to take action against them also.

In conjunction with this, through their educational and thematic work, FSA are reaching out to the industry to give it the guidance and support it needs to play its part in the fight against market abuse.

And via this approach, the regulator aims to achieve changes in market behaviour through a change in culture.  This is consistent with the FCA’s proposed approach to regulation more widely and will continue through to the new world of regulation under the Financial Conduct Authority (FCA). The FCA will strive to achieve improved culture in firms more generally.  They will encourage better corporate governance and remuneration structures that do not incentivise short termism.   These are themes that resonate across the whole of the FCA’s approach to regulation in the retail and wholesale sectors.

The FCA will also turn its focus more towards wholesale conduct than regulators in the past previously have.  The FCA’s approach recognises that activities in retail and wholesale markets are connected and that risks caused by poor conduct can be transmitted between them.  What may start with institutional relationships, often affects retail consumers.

Improving market conduct is also critical to the FCA’s market integrity objective.  Market participants must be seen to abide by high standards of market conduct in order for investors generally to have confidence in the markets and London to be seen as a safe place to do business.  That is why the FSA are prepared to impose record fines on firms that fail to control their traders resulting in the manipulation of the LIBOR benchmark.  Or when a firm’s controls fail allowing a relatively junior trader such as Kweku Adeboli to be able to take risk positions so great that they threaten to cause systemic risk to a global firm and indeed the financial system as a whole.

In short, therefore, the FSA’s tough approach to market abuse is here to stay. 


Fines - Suitability Failings
Making sure products are suited to the clients who buy them continues to remain close to the top of the regulatory agenda. Last month the FSA fined Savoy Investment Management Limited (Savoy) £412,000 for failing to take reasonable care to ensure the suitability of their products to its clients.

Savoy allowed their managers a high degree of discretion to advise its clients on their products. It had limited front office controls and its other processes failed to ensure the suitability of its advice and products. This included failures to collect and record client information and failures in its compliance monitoring processes.

As a result of these failings, a review of a sample of files found that 23% showed a high risk of unsuitability. The FSA reviewed Savoy as part of its thematic review of the wealth management sector. The thematic review found there was an unacceptable risk of clients experiencing unfavorable outcomes.

Tracey McDermott, director of enforcement and financial crime at the FSA, said:

“It is critical that firms properly identify and record client needs and monitor the suitability of their advice ...”

Savoy is doing a past business review of its services to its clients, which will determine whether clients need to be compensated. Savoy agreed to settle at an early stage and qualified for a 30% discount, without which the fine would have been £590,000.  Savoy has also taken steps to change its management structure and processes.  Without these changes and the past business review, the financial penalty would have been higher. 

ICO and Subject Access Requests
The ICO has launched a consultation on a new draft code that will help organisations to handle subject access requests, while supporting the public in taking control of their personal information.

Regardless of the level of claims a firm handles, under the Data Protection Act, anyone has the right to find out what information an organisation holds about them by making a subject access request. This right allows individuals to find out important information ranging from details recorded on their credit history to data included in their health record. Once received, an organisation normally has forty days to reply to the request.

During the last financial year, the ICO handled nearly 6000 complaints from individuals unhappy that organisations were not complying with the law by allowing them to view their file – more than any other type of complaint. The final version of the code will aim to clear up any confusion, by clearly and simply explaining an organisation’s legal responsibilities and individuals’ rights under the Act.

Announcing the start of the ICO’s consultation, David Smith, Deputy Commissioner and Director of Data Protection, said:

“At a time when organisations are collecting more and more of information about us, whether online or offline, subject access requests play an increasingly important role in helping us take control of our personal information. They can also benefit organisations by highlighting inaccuracies in their records and giving them the opportunity to update the information they keep about us.

“We have published the draft subject access code on our website to provide an early indication of what our guidance will look like. We would now like to hear from individuals and organisations who have experience with handling or making subject access requests to see where they believe the draft code could be improved. We will then publish a final version of the code in Spring 2013.”  

Further information is available on the ICO’s consultation page. The closing date for this consultation is 21 February 2013.

ICOBS 3 Annex - Distance marketing information
Firms must provide:

• the identity of the person in contact with the consumer and his link with the firm;
• a description of the main characteristics of the financial service;
• the total price to be paid by the consumer to the firm for the financial service including all taxes paid through the firm or, when an exact price cannot be indicated, the basis for the calculation of the price enabling the consumer to verify it;
• notice of the possibility that other taxes or costs may exist that are not paid through the firm or imposed by it;
• the existence or absence of a right to cancel in accordance with the cancellation rules and, where the right to cancel exists, its duration and the conditions for exercising it, including information on the amount the consumer may be required to pay (or which may not be returned to the consumer) on the basis of those rules;
• that other information is available on request and what the nature of that information is.

ICOBS – Focus on High Level Standards

While ICOBS (the part of the FSA handbook relevant to general insurance) comes in at 113 pages, it synthesises down to some very simple high-level principles:

A firm must take reasonable care to ensure our advice is suitable for our customers.
A firm should also take reasonable care to ensure a policy is suitable for the customer's demands and needs, taking into account the policy's level of cover and cost, and relevant exclusions, limitations and conditions.

Product disclosure
A firm must take reasonable steps to ensure our customer is given appropriate information about a policy in good time and in a comprehensible form so they can make an informed decision.
Note: This applies both before and after they buy the product and it includes price.  The information we give will depend on the customer, the policy's terms and its complexity.

Claims handling
Insurers or orgnisations acting for them must treat customers fairly when handling claims.

ICOBS 4.4 Commission disclosure for commercial customers
By no means a new regulatory development; but it is worth reminding ourselves that Advantage must, on a commercial customer's request, promptly disclose the commission that it and any associate receives in connection with a policy.

Disclosure must be in cash terms and in writing or another durable medium. To the extent this is not possible, Advantage must give the basis for calculation. Advantage should include all forms of remuneration from any arrangements it may have. This includes arrangements for sharing profits, for payments relating to the volume of sales, and for payments from premium finance companies in connection with arranging finance.

The commission disclosure rule is additional to the general law on the fiduciary obligations of an agent in that it applies whether or not the insurance intermediary is an agent of the commercial customer.

In relation to contracts of insurance, the essence of these fiduciary obligations is generally a duty to account to the agent's principal. But where a customer employs an insurance intermediary by way of business and does not remunerate him, and where it is usual for the firm to be remunerated by way of commission paid by the insurer out of premium payable by the customer, then there is no duty to account but if the customer asks what the firm's remuneration is, it must tell him.


Advertising Standards Agency (ASA)
Whether it is related to the marketing of regulated products or more general marketing activity, the professional and brand headache of having an advertisement attract the attention the Advertising Standards Authority can be problematic to put it mildly. To address this challenge ASA have created a growing range of advice services.

Bespoke Copy Advice
Standard, free of charge, Copy Advice requests and advertising items you want reviewed by the ASA can be submitted by the marketing department as per the details below. ASA aim to respond within 24 hours.

You need to register with ASA to submit a request. You will be prompted to register/login as part of submitting your enquiry.  Find out more about Copy Advice here in their webpage FAQ section. 

Firms’ marketing teams can call one of ASA’s advisers between 9 am and 6 pm on 020 7492 2100 for free advice and a 24 hour turn-around. A paid-for 4 hour turn around review service is also available.