"Dear CEO" letter sets out FCA expectations of SIPP operators

In a "Dear CEO" letter published on 2 December 2020, the FCA highlighted its key concerns about the SIPP market and set out its expectations of SIPP operators.

FCA's key concerns

The FCA is concerned:

• that SIPP members with relatively simple investment needs may be paying relatively high charges for investment flexibility that they do not use or need;
• that some investments made available within SIPPs have turned out to be scams or have involved unregulated introducers.  This has led to some SIPP operators entering insolvency because they lack the resources to meet claims against them when members seek redress.

The FCA's expectations

1.   Financial resources

When assessing capital requirements, SIPP operators should take into account potential liabilities arising from complaints to the Financial Ombudsman Service, disputed HMRC tax assessments, or legal claims.  Calculations should take account of "adverse but plausible scenarios" such as providing redress to consumers who have not yet complained, but may be affected by a root cause issue identified by other upheld complaints.

Firms subject to the Liquid Capital Requirement of IPRU-INV 5.9 of the FCA Handbook should regularly review the assets held within their SIPPs to determine whether they are standard or non-standard for the purposes of calculating the firm's detailed requirement.

If at any time a firm concludes it does not have adequate financial resources, it should notify the FCA immediately.

2.  Complaints handling

Firms must take reasonable steps when handling complaints to identify and remedy any recurring or systemic problems.  Where firms identify root cause issues, they should consider whether it is appropriate to give redress, or a proper opportunity to obtain it, to customers in similar circumstances who have not yet complained.

Selling personal data to claims management companies may give rise to issues around the fair treatment of customers and compliance with privacy laws.

3.  Pension scams

If, as a result of performing due diligence, a SIPP operator becomes aware of problems with an investment or with those introducing business to the firm, it must take appropriate action to act in the best interests of its clients.  This may include declining to proceed with the investment or new business.

4.  Product governance

SIPP operators should have robust governance and clearly and appropriately defined target markets that are specified in information to distributors.  SIPP products should be reviewed on an ongoing basis to ensure they are reaching their target market and that the needs of vulnerable customers are met appropriately.

5.  International SIPPs

Firms operating an international SIPP that includes acceptance of offshore investment bonds should consider whether this delivers appropriate outcomes for customers.  The FCA's view is that the tax benefits of investing in this way are largely redundant to someone investing in a UK personal pension scheme.  Firms should conduct due diligence on all overseas advisory firms and investments introduced by them.

Next steps

The FCA says it will target its supervisory focus on firms where there is evidence of failings on the obligations and expectations set out in its letter.  It will maintain a focus on these areas when assessing Change in Control notifications or authorisation applications made by existing firms.

FCA consults on new Consumer Duty

The FCA is consulting on a proposed new "Consumer Duty" which is likely to have wide ranging and potentially onerous implications for regulated firms.

The proposed Consumer Duty is designed to enhance existing conduct standards in retail markets, drive culture change and instil consumer trust.  The FCA wants firms to put consumers at the heart of their business by proactively avoiding consumer harm at every level of their business and through every stage of the customer journey. It will place the onus on firms to abide by a new Principle for Business and to aim to deliver specific outcomes when designing, advising on or distributing products and services to retail clients. Importantly, all firms will be subject to rules specifically requiring them to take all reasonable steps to avoid causing foreseeable harm to consumers.  For more detail, see our briefing "FCA Consumer Duty: early considerations for firms".

FCA consults on enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers

The FCA is consulting on proposals to introduce climate-related financial disclosure rules and guidance for asset managers, life insurers and FCA-regulated pension providers.  It is intended that the disclosures will be aligned with the recommendations of the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD).  The FCA is introducing a new "Environmental, Social and Governance (ESG) Sourcebook" in the FCA handbook to set out its proposed rules and guidance.

Scope

Life insurers are within the scope of the FCA's proposals in relation to insurance-based investment products and defined contribution pension products.  Non-insurer SIPP operators are in scope to the extent that they provide a ready-made selection of investments.  There will be an exemption for firms that have less than £5 billion in assets under management or administration on a 3-year rolling average.

Disclosure requirements

The FCA is proposing requirements for disclosures to be made at two levels:

• Entity-level disclosure requirements. These require firms to make disclosures annually on how they take climate related risks and opportunities into account in managing or administering assets on behalf of their clients and consumers.  These disclosures must be made on the firm's main website.  The contents of the report must be consistent with the TCFD's recommendations, covering governance, strategy, risk management and metrics and targets.
• Product or portfolio-level disclosure requirements. These require firms to make disclosures annually in respect of the individual products or portfolio management services they offer.  This must be done on their website and in appropriate client communications.  These disclosures would comprise a baseline set of core mandatory carbon emissions and carbon intensity metrics, additional metrics where possible, and scenario analysis. Firms must include disclosures on governance, strategy and risk management insofar as they are materially different to disclosures made at entity level and where firms consider that more detailed information would be useful to clients and consumers.

Timing of implementation

The FCA is proposing that the rules will come into force in two phases.

• First phase: from 1 January 2022 the rules will come into force for asset managers with assets under management of more than £50 billion, and life assurance companies and non-insurer SIPP operators with £25 billion or more in assets under management or administration in relation to in-scope business.  The publication deadline for first disclosures will be 30 June 2023 with subsequent disclosures to be made by 30 June each year.
• Second phase: from 1 January 2023 the rules will take effect for remaining firms above the £5 billion threshold.  The first publication deadline will be 30 June 2024, with subsequent disclosures to be made by 30 June each year.

Consultation deadline

The consultation closes on 10 September 2021.

FCA Business Plan 2021/22

The FCA published its Business Plan 2021/22 at the end of July.  In relation to pension products, the FCA intends to focus on product design during accumulation (ie saving for a pension) in order to help consumers make better decisions.  The FCA plans to:

• work jointly with the Pensions Regulator to launch an "evidence-led view" on how best to drive value for money in pensions, using evidence and insight on what information firms should give consumers and how these disclosures can help them in making informed choices; and
• consult on changes for non-workplace pension providers to ensure consumers are offered an appropriate default solution where they need it.

During 2022, the FCA says it will assess how its rules to help consumers make choices at the point of retirement have been working.  The FCA will also implement the "nudge to Pension Wise". (See our separate item on this.)

Pensions consumer journey: Call for Input document

The Pensions Regulator and FCA have published a joint Call for Input on what else they can do to help engage consumers so that they can make informed decisions that lead to better pension saving outcomes.  The Call for Input requests responses by 30 July 2021 following an extension to the original deadline of 30 June.

FCA guidance on fair treatment of vulnerable customers

The FCA has published its final guidance for firms on the fair treatment of vulnerable customers.  For more detail, click here.

FCA warns some SIPP operators not calculating liquid capital correctly

In its February Regulation round-up, the FCA reported that it had found some SIPP operators are not calculating liquid capital correctly in line with IPRU-INV 5.8.  In particular, some firms have not deducted all amounts that should have been treated as illiquid assets.  These include intercompany balances not readily realisable and debtor balances overdue by more than a month by reference to the contractual payment date.

FCA investment pathways rules in force

The FCA's rules on investment pathways (on which we reported in our January 2020 Update) came into force on 1 February 2021.  The FCA had originally intended to bring the rules into force on 1 August 2020, but delayed the coming into force date due to Covid-19.

31 March 2021 deadline for solo-regulated firms directory persons data

The deadline for solo-regulated firms (ie those regulated solely by the FCA) to submit Directory Persons  data passed on 31 March 2021.  Under the Senior Managers and Certification Regime (SM&CR) the FCA publishes a directory of various key individuals at regulated firms (referred to as "certified and assessed persons") so that consumers and professionals can check the details of key individuals working at financial services firms.

FCA international SIPPS warning 

In a portfolio letter for SIPP operators issued on 2 December 2020 the FCA says that it has received enquiries from expatriate consumers who were advised by overseas advisory firms to transfer their UK pension into an "international SIPP".  The FCA says that consumers may pay significant fees for these arrangements, particularly where a SIPP operator allowed investment through an offshore investment bond.  The FCA's view is that the tax benefits accessed by investing in this way are largely redundant to someone investing in a UK personal pension scheme.  It tells firms that operate an "international SIPP" that includes acceptance of offshore investment bonds that they should consider whether this delivers appropriate outcomes for customers.  In particular, the FCA tells firms to ensure:

• that any business accepted is in their clients' best interests in accordance with COBS 2.1.1R;
• product governance is robust;
• charges disclosures meet the requirements of COBS 13 (and include appropriate information on all charges within the pension, including the offshore bond and underlying investments);
• adequate due diligence is performed on all overseas advisory firms and investments introduced by them; and
• that the firm appropriately manages any conflicts of interest.

Discussion paper on strengthening financial promotion rules for high risk investments

The FCA has published a Discussion Paper "Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions".  The Discussion Paper seeks views on three areas where changes could be made to protect consumers from harm:

• the classification of high-risk investments;
• the segmentation of the high-risk investment market; and
• the responsibilities of firms who approve financial promotions.

The consultation closed on 1 July 2021.

Operational Resilience, outsourcing and third party risk management policies finalised

Operational Resilience is set to be the next major regulatory initiative over the next couple of years.  At the end of March the FCA and PRA released their finalised policy statements, near final rules, and, in the case of the PRA, a supervisory statement and statement of policy on operational resilience. The PRA has also released its finalised policy and supervisory statement on outsourcing and third party risk management. The regulators' objective is that firms will strengthen their overall resilience by:

• identifying their important business services (IBS) by considering how disruption to them can have impacts beyond their own commercial interests; 
• mapping their IBS with a view to identifying vulnerabilities and remedying these as appropriate, and enabling firms to conduct scenario testing;
• setting a tolerance for disruption for each IBS (an impact tolerance); and 
• ensuring they can continue to deliver their IBS and are able to remain within their impact tolerances during 'severe but plausible' scenarios.

There are two key dates to note: 

• 31 March 2022 – firms should have mapped their IBS, set impact tolerances for those IBS and commenced a programme of scenario testing; and
• 31 March 2025 (and on an ongoing basis from that date) – a hard deadline, by which all firms should have sound, effective, and comprehensive strategies, processes, and systems that enable them to address risks to their ability to remain within their impact tolerance for each IBS in the event of a severe but plausible disruption.

For more detail, see the briefing prepared by Addleshaw Goddard's Operational Resilience team that comprises specialists in regulatory law, data, contracts and third party risks, compliance and IT and systems development.

Regulatory Initiatives Grid published

In May 2021 the third edition of the Regulatory Initiatives Grid was published.  The grid sets out regulatory initiatives that are in the pipeline for the financial services sector and covers initiatives from a number of different regulators, including the FCA, the Pensions Regulator and the ICO.  It includes a section on initiatives related to pensions and retirement income.

FCA clarifies expectations re publication of costs and charges data

On 3 June 2021 the FCA issued a statement clarifying its expectations regarding the requirement for workplace pension scheme providers to publish costs and charges data under the new rules made by the FCA in February 2020.  The first publication of data under the new rules is due this summer when Independent Governance Committees publish their annual reports.  It has emerged that different firms have been taking different views as to whether data need to be published (a) at employer level or (b) at scheme level with the data indicating the range of charges paid by members according to their employer's arrangements under the scheme.  The FCA says that the approach of publishing at employer level aligns more closely with its aim for the rules.  However, it acknowledges that it did not specifically state that an employer level disclosure was expected.  Taking into account the timescale for disclosure, the FCA says that it does not intend to take regulatory action against firms that, for this reporting year:

• disclose each set of costs and charges that they levy (and the number of "employer schemes" which have these costs and charges), or
• show the distribution of costs and charges by employer arrangement in some other way, for example by dividing the range of charges into deciles (ie without also disclosing the relevant employer or scheme details against the particular costs and charges).

The FCA intends to publish a policy statement which will clarify its expectations and will consider whether to make changes to its Handbook to ensure clarity.