Joint PRA and FCA Statement on SM&CR regime

In April the FCA and PRA issued a joint statement on their expectations of dual-regulated firms in relation to the Senior Managers and Certification Regime (SM&CR) and Covid-19.  Points covered by the statement included:

• Notifications about changes to Senior Manager responsibilities.  The FCA and PRA said they expect firms to resubmit Statements of Responsibilities (SoRs) on a change of Senior Management Functions (SMFs) as soon as reasonably practicable, but understand that this might take longer than usual.
• Notifications about temporary arrangements.  If firms cannot allocated an absent SMF's Prescribed Responsibilities (PRs) among their remaining SMFs due to reasons relating to coronavirus they can temporarily allocate them to the individual acting up as interim SMF under the "12 week rule" even if the individual is not approved as an SMF.  Firms should keep a clear "running commentary" of any temporary allocation of PRs to unapproved individuals and update their PRA and/or FCA Supervisors regarding any temporary allocation of PRs to unapproved individuals.
• Allocating responsibility for coordinating firms’ responses to coronavirus among SMFs.  The FCA and PRA do not require or expect firms to designate a single SMF to be responsible for all aspects of their response to coronavirus.  An exception is the identification of "key workers" which should be allocated to the CEO.
• Furloughing Senior Management Functions.  Individuals performing mandatory SMFs should only be furloughed as a last resort.  Firms have greater flexibility regarding furloughing non-mandatory SMFs, but should think carefully about the risks of doing so.  Furloughed SMFs who are not leaving their post permanently will retain approval during their absence.  Responsibilities of furloughed SMFs should be reallocated and this should be clearly documented.  Firms should update their PRA and FCA supervisors of any furloughing of SMFs.
• Certification requirements.  Firms should take "reasonable steps" to complete any annual certifications of employees that are due to expire while coronavirus restrictions are in place, but what constitutes "reasonable steps" may be altered by the current circumstances.

FCA delays coming into force of various measures due to Covid-19

On 3 April the FCA made rules delaying the coming into force of various measures due to the Covid-19 pandemic.  The measures include:

• delaying the Pensions Transfer Specialist Qualification rules until 1 October 2021;
• delaying the implementation date of the rules in its Policy Statement 19/21 on investment pathways so that they come into force on 1 February 2021 instead of 1 August 2020;
• delaying the implementation date of the rules in its Policy Statement PS19/29 Making transfers simpler (which deals with in specie transfers and unit class conversions) to 1 February 2021 instead of 31 July 2020.

FCA publishes guidance on giving consumers pension information without advice

On 7 April 2020 the FCA published "Pensions and Retirement income: our guidance for firms" addressing some of the issues faced by firms as a result of Covid-19.  The guidance includes a section on how pension providers can have "meaningful discussions with consumers about the risks and consequences of some actions without straying into providing advice".

Dear CEO Letter to firms providing services to retail investors about coronavirus (Covid-19)

On 31 March the FCA published a Dear CEO letter addressing various issues facing firms as a result of Covid-19.  Items covered included:

• Client identity verification.  The letter noted that restrictions on non-essential travel had affected firms' abilities to use traditional methods to verify a customer's identity.  The letter said that the FCA expected firms to comply with client verification requirements and gave various examples of ways in which client verification can be carried out remotely.
• Supervisory flexibility over 10% depreciation notifications until the end of September.  The letter noted that firms providing portfolio management services or holding retail client accounts that include leveraged investments are currently required to inform investors where the value of their portfolio or leveraged position falls by 10% or more compared with its value in their last periodic statement, and for each subsequent 10% fall in value.  The FCA said that in the period to 1 October 2020 the FCA has no intention of taking enforcement action where a firms has issued at least one such notification to a retail client within a current reporting period and subsequently provides general updates through its website, social media channels and/or generic client communications.  Such communications should update clients on market conditions, explain how clients can check their portfolio value and invite clients to contact the firm if they wish.  The FCA will also not take enforcement action in the period to 1 October 2020 where a firm chooses to cease providing 10% depreciation reports for any professional clients.
• Financial resilience.  The letter clarified that government schemes can be used to help firms plan how to meet debts as they fall due and help firms remain solvent in the immediate period.  However, government loans cannot be used to meet capital adequacy requirements as they do not meet the definition of capital.

Statement on Work-related travel – responsibilities of Senior Managers

On 27 March the FCA published a statement to make it clear to firms how they should prioritise who should need to travel to the office and the responsibilities of Senior Managers in doing so.  The statement says that the FCA strongly supports the Government's efforts to protect the public by ensuring only those workers who cannot work from home continue to travel to and from work.  The FCA says that each firm's designated Senior Manager or equivalent person is responsible for identifying which employees are unable to perform their jobs from home.  The FCA expects the total number of roles requiring an ongoing physical presence in the office to be far smaller than the number of workers needed to ensure all of a firm's business activities continue to function on a business as usual basis.  The FCA says it would not expect the following to go into work or meet face to face:

• financial advisers, as they can offer their services online or by phone;
• staff who can safely and securely trade shares and financial instruments from home;
• business support staff, such as those in IT where they can triage issues from home, unless they are looking after specific equipment or technology;
• claims management companies and those selling non-essential goods and credit.

The FCA says that it expects the number of exceptions to this to be low.

Consultation on Regulated fees and levies

The FCA has consulted on its proposed regulatory fees and levies for the financial year 1 April 2020 to 31 March 2021.  The consultation says that the 71% of firms that are small enough to pay only minimum fees will see no change in the fees they pay.  Given the impact of Covid-19, the FCA proposes that firms in the category of medium or smaller firms will have 90 days from the date of the invoice to pay their fees and levies instead of the usual 30 days.  Larger firms will be expected to pay their fees under the usual payment terms.  The FCA is categorising medium and smaller firms as those firms who pay a total fees and levies in 2020/21 of less than £10,000, the total to include all the fees and levies they pay to the FCA, PRA, the Financial Services Compensation Scheme, the Financial Ombudsman Service, Money and Pensions Service, Devolved Authorities, the Payment Systems Regulator, the Financial Reporting Council and under the illegal money lending levy.

Policy statement on publishing and disclosing costs and charges to workplace pension scheme members

On 2 February the FCA published its final rules and guidance on requiring pension scheme governance bodies to report costs and charges information to members of workplace pension schemes. Since 3 January 2018, FCA rules have required asset managers to report costs and charges information to the operator, trustee or manager of workplace pension schemes.  The FCA's latest policy statement on this issue sets out the rules on requiring scheme governance bodies to disclose this information to members on an ongoing basis.  The FCA had proposed that provider firms should ensure that scheme governance bodies:

• set out the costs and charges imposed on scheme members in the Chair's report, and that this should be for each default arrangement and each alternative fund option the member can select;
• include an illustration of the compounding effect of the aggregated costs and charges;
• publish this information, free of charge, on a publicly available website at least yearly within 7 months of the scheme year end;
• ensure all scheme members get an annual communication which includes a brief description of the most recent costs and charges information available and how it can be accessed and also make this information available on request to members, their spouses/civil partners and other prospective beneficiaries.

In response to consultation feedback, the FCA has adjusted its final rules to:

• exempt single member schemes with direct payment arrangements;
• clarify that the scheme governance year will run from 1 January to 31 December 2020 and that costs and charges information for 2020 should be published by 31 July 2021, with subsequent scheme governance years following the same pattern;
• allow the provision of illustrations for a representative range of funds/options rather than requiring the provision of illustrations for all available funds/options;
• phase in the introduction of the rules so that for the first scheme year, costs and charges will only have to be reported for default options/funds;
• only require the chair's report to include costs and charges for default options/funds.

The rules came into effect on 1 April 2020.

FCA confirms ban on contingent charging for pension transfer advice

In its Policy Statement PS20/6 published on 5 June, the FCA has announced its intention to proceed with a ban on contingent charging for advice on pension transfers (subject to limited exceptions).  "Contingent charging" refers to the practice whereby an adviser only charges where a transfer proceeds.  

The FCA is concerned that the number of people taking transfers from defined benefit to money purchase arrangements indicates that a significant proportion of such individuals are transferring when it is not in their interests to do so, and that the practice of contingent charging leads to advisers having a conflict of interest.  To address this, unless an exception applies, advisers will be required to charge the same monetary amount for advice to transfer as advice not to transfer.  The ban will take effect on 1 October 2020.  Transitional arrangements will allow contingent charging where a firm has agreed contingent charging terms with a client and started work before 1 October provided a personal recommendation is given before 1 January 2021.

There are two exceptions to the contingent charging ban: (a) serious ill-health; and (b) serious financial difficulty.  The serious ill-health exception applies where an individual has a medical condition which means the individual's life expectancy is likely to be lower than age 75 and the individual does not have the means to pay for advice (including cases where the individual would be forced into debt if he/she had to pay for advice).  The serious financial difficulty test is intended to apply in the type of situation set out in the Money and Pensions Service's definition of over-indebtedness, which is where:

• keeping up with domestic bills and credit commitments is a heavy burden; and
• payments for any credit commitments and/or domestic bills have been missed in any 3 or more of the last 6 months.

Other measures announced in the Policy Statement include:

• the ability for advisers to provide abridged advice that can only result in:
  • a personal recommendation to the client not to transfer or convert their pension; or
  • informing the client that it is unclear whether or not they would benefit from a transfer or conversion based on the information collected.  The adviser would then ask the client whether the client wishes to proceed to full advice;
• a requirement for firms to explain why the scheme they are recommending is more suitable than the default arrangement in an available workplace pension scheme;
• a requirement for advisers to provide personalised charges information before the advice process starts, and for firms to get evidence that the client understands the risks of pension transfer;
• a requirement for pensions transfer advice specialists to undertake 15 hours of CPD per year focussed specifically on the activities of a pension transfer specialist;
• a requirement for all personal investment firms who submit data on PII to review and submit new information on any policy exclusions in their contract;
• changes to data required by the FCA in relation to pension transfer advice;
• technical changes to the pension transfer definition in COBS.

Following publication of the Policy Statement, the Pension Scams Industry Group (PSIG) issued a press release in which it welcomed the FCA measures, particularly the ban on contingent charging, as a very positive step, but urged the FCA to urgently consider DC scheme members as well as DB scheme members in their policy statement proposals, given that the issue of pension scamming affects members with all types of pension product.

FCA Business Plan 2020/21

At the start of April the FCA published its Business Plan 2020/21.  The FCA acknowledges the profound effect of Covid-19 on the financial lives of consumers and the workings of markets, and says that it has delayed other activity it had planned where it judges that it was not urgent and may have distracted firms from the immediate priority.  The FCA says its five key priorities over the next 1-3 years are:

• Transforming how it works and regulates with a view to making faster, more effective decisions, focussing on outcomes for consumers and firms, making better use of intelligence and information, and making stronger links with international partners;
• Enabling effective consumer investment decisions, ensuring investment products are appropriate for consumer needs and that firms operate under high regulatory standards and act in consumers' interests.  The FCA specifically mentions pension scams in relation to this priority;
• Ensuring consumer credit markets work well, focussing in particular on the potential impact of the Covid-19 crisis on this market;
• Making payments safe and accessible, ensuring consumers transact safely with payment firms, payment firms meet their regulatory responsibilities while competing on quality and value, and consumers and SMEs have access to a variety of payments services.
• Delivering fair value in a digital age, ensuring consumers can choose from suitable products that meet their needs and that digital innovation and competition supports greater value for consumers.

As well as setting out its five overall priorities, the business plan identifies six "cross-cutting priorities" (ie areas that cut across sectors and have a broad market impact) and four sector-specific areas which it will aim to focus on.  The six cross-cutting priorities are:

• EU withdrawal and wider international work;
• climate change;
• using innovation and technology to regulate effectively;
• operational resilience requirements for firms;
• financial crime; and
• culture in financial services, with a focus on compliance with the Senior Managers & Certification Regime.

The four sector-specific areas on which the FCA plans to focus are:

• wholesale financial markets, including transaction services, wholesale lending, advising, arranging, broking, trade execution, clearing and settlement;
• investment management; 
• retail banking; and
• general insurance & protection.

Dear CEO letter on approach to supervising platforms

On 6 February the FCA published a Dear CEO letter to firms providing a platform service and assigned to the FCA's "platforms portfolio".  The letter notes that the Senior Managers & Certification Regime (SM&CR) was extended to solo-regulated firms, including platforms, from 9 December 2019.  The FCA says it expects CEOs to ensure there is clear accountability and understanding in relation to a number of issues identified in the FCA's letter as carrying particular risk of harm if not properly managed, namely:

• technology and operational resilience.  The FCA particularly emphasises the importance of protecting customers from the threat posed by cyber-attacks and financial crime and having clear responsibility for meeting reporting obligations for operational incidents such as cyber-attacks;
• third-party outsourcing.  The FCA says it expects firms to have clear contractual arrangements and plans in place with service providers to whom services have been outsourced, and to undertake reviews to ensure the service provider is providing the services to a proper standard;
• conflicts of interest.  The FCA expects firms to have processes in place to effectively manage conflicts of interest.  Where firms operate Best Buy lists, processes for clear selection, monitoring and deselection of funds on lists should be documented, understood and followed;
• Investment platforms market study (IPMS).  The FCA expects firms to be considering whether there are areas requiring work to implement the recommendations in the IPMS final report, including:
  • implementing adherence to the new rules published in PS19/29 designed to make transfers simpler;
  • best execution.  The FCA expects firms to have effective day-to-day trade execution processes, contingent arrangements for periods of market distress and comprehensive and effective oversight and monitoring;
• EU Withdrawal.  Firms will need to consider how the end of the transitional period, due to occur on 31 December 2020, will affect them and their customers.

The FCA says it will target its supervisory focus on firms where there is evidence that the expectations set out in its Dear CEO letter are not being met.

Changes to permitted links rules

On 4 March the FCA announced changes to the "permitted links" rules with immediate effect.  The permitted links rules apply to unit-linked products sold by life assurance companies which have underlying pooled investments.  The wrapper for such funds is in most cases an insurance-based pension.  The permitted links rules, set out in COBS 21.3, specify the types of investment (the "permitted links") insurers can make when the investment risks of a contract lie with an individual.  The new rules broaden the range of underlying investments which may be held, including removing a barrier to investment in certain types of infrastructure such as rail track, bridges, roads, runways, wind turbines, hydroelectric schemes and solar farms, subject to limits designed to limit the proportion of funds held in illiquid investments.