26 January 2021
By Mark Greenwood, Director of Compliance Services
Like everybody else, I could not have predicted what 2020 was going to bring, however the one area I would have predicted correctly was more regulation. With this in mind, I thought it would be useful to have a look at some of the regulatory highlights of 2020 and consider the potential FCA timeline of work / activities to be undertaken in 2021.
The year started with a bang with The Fifth EU Anti-Money Laundering Directive (5th MLD).
The 5th MLD provided amendments to the 4th MLD with the measures within the updated Directive intending to improve transparency and the existing preventative anti-money laundering framework to more effectively counter money laundering and terrorist financing across the EU.
The new rules came into force on 10 January 2020 and were implemented through the ‘The Money Laundering and Terrorist Financing (Amendment) Regulations 2019’. The changes affected Customer Due Diligence, Enhanced Due Diligence, Beneficial Ownership and Reporting Discrepancies and all our anti-money laundering procedures documentation was duly updated to reflect these changes.
Just as we had digested the 5th MLD on 21st January the FCA published a ‘Dear CEO letter’ which was sent to all advice firms with investment permissions.
The letter set out the FCA approach to tackling key areas of concern with financial advice firms and told firms that there will be increased focus on the areas below as part of their wider supervision of firms over the next two years -
The letter identified four key ways in which consumers of financial advice may be harmed:
The most important aspects of the letter focussed on Assessing suitability of advice and disclosure, Defined benefit pension transfer advice, Pensions and investment scams, Adequate financial resources and professional indemnity insurance, a ban on the promotion of speculative mini-bonds to retail consumers and the Senior Managers and Certification Regime.
Dear CEO letters are usually only published by the FCA for matters that relate to consumer protection and market integrity. It was therefore no surprise that on the 31st March, the FCA published a letter titled ‘Dear CEO Letter to firms providing services to retail investors about coronavirus (Covid-19)’.
The letter highlighted the changes the FCA had made to support firms and consumers as a result of the unprecedented set of circumstances linked to the coronavirus (Covid-19) emergency.
One of the main changes allowed firms more flexibility for client verification as the traditional method of carrying out client verification of personal and home visits would prove to be a challenge during lockdown.
Another change was that the FCA made a dispensation on the notification rules for discretionary portfolios. The FCA stated that firms would no longer be required to issue further client notification of 10% drops in the value of a client portfolio where the client had recently been informed of a 10% drop and where there is ongoing communication with clients either collectively (i.e., through a website) or individually.
From the middle of March, the FCA started to reduce the number of papers and thematic work it was undertaking to reduce the pressure on firms and themselves as a result of Covid-19.
As the regulator began to work through the gears back to full speed back in June one of the first pieces of regulatory work to be published was their remedies to improve the suitability of advice in the defined benefit pension transfer market and address what it perceived to be failings in this market in the past.
This included the publication of PS20/6 ‘Pension transfer advice: feedback on CP19/25 and our final rules and guidance’ that set out a package of measures which the regulator believes will lead to higher quality advice. As expected, many of the proposals, as outlined in the corresponding Consultation Paper 19/25 were to be implemented albeit with some amendments and clarifications to the original proposals. This included the ban on contingent charging which came into effect on 1st October 2020. The decision to proceed with the ban on contingent charging was not a surprise, given this was the main focus of the consultation.
As well as the above policy statement at the same time the FCA published GC20/1: ‘Advising on pension transfers’. This provided guidance on what the FCA expect from firms when advising on pension transfers and conversions, particularly from defined benefit (DB) schemes to defined contribution (DC) schemes. If your firm is active in this market, I would recommend that you read this consultation paper, if you do not have the appetite to read all 96 pages of this FCA paper I would recommend our guide to non-contingent charging and other rule changes available on our website.
The FCA was forced to postpone its guidance on vulnerable clients back in March because of the coronavirus pandemic but in July it eventually published GC20/3 ‘Guidance for firms on the fair treatment of vulnerable customers’.
The paper introduced guidance to help drive change by providing clarity and focusing firms’ attention on what they should do to comply with the FCA Principles. The key message in this paper was that the FCA want to make sure the fair treatment of vulnerable consumers is properly embedded by firms in their culture, policies and processes.
We know that vulnerable clients are a key priority for the regulator and this focus will only be heightened by the unprecedented events of 2020.
If your firm has not set out your approach to dealing with vulnerable persons, I would recommend you visit our Vulnerability Hub or contact our compliance helpdesk if you have any questions in this area.
The FCA amended legislation to extend the first assessment of Fit and Proper under SM&CR from 9 December 2020 to 31 March 2021. The FCA recognised some firms have been significantly affected by the coronavirus pandemic and this sympathetic approach, towards those individuals who have suffered as a direct consequence, must be applauded.
Our view was that the FCA expected the majority of firms to be still working towards the 9 December deadline, and we encouraged firms, where possible, to aim to have their FIT assessments completed and their Certified Persons uploaded to the Directory by the original date of 9 December 2020.
It is worth noting that only those persons certified as fit and proper and uploaded to The Directory will appear under your firm’s name.
If at the time of reading this article you have not completed your FIT assessments and uploaded your Certified Persons to the Directory, I would recommend that you visit our SM&CR Hub that contains our library of guides and a whole host of information on SM&CR awareness, training and policy documents.
What regulation do we expect in 2021?
At the time of writing this article things are still quite fluid and therefore so is the FCA timeline of work / activities to be undertaken in 2021.
The regulator delayed its second review of the advice consumers receive around retirement income due to the coronavirus pandemic. Assessing suitability review 2 is scheduled to start again in 2021 and will focus on initial and ongoing advice to consumers on taking an income in retirement.
Some areas to consider regarding this review are –
If you receive a letter from the FCA as part of this review I would recommend that you speak with our compliance helpdesk who will be able to assist you.
The FCA has highlighted vulnerable customers as a priority in their last two business plans.
We are still awaiting the FCA’s finalised guidance on vulnerable customers, but this is expected in quarter 1 of 2021.
As I mentioned, the FCA timeline of work / activities to be undertaken in 2021 is still quite fluid but rest assured if there are any regulatory changes that will affect the firms that we serve we will be in touch to highlight the changes and the support that we offer to assist you with these changes.
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