Compliance Calling 7th March 2017
Written by Charlie Palmer on 10/08/2018

Risk and the need for Reg-tech 
Magistrates' Court fines DFS Trading Ltd £1million following conviction for health and safety breach.&; An employee of DFS Trading Ltd was unloading wooden furniture frames at one of their upholstery sites, when he was hit by unsecured furniture which fell from an unstable load. He was knocked unconscious and suffered serious neck and head injuries. A Health and Safety Executive investigation found that DFS failed to adequately manage the risks of heavy loads being moved between manufacturing sites. The company was fined £1 million.

Magistrates' Court fines construction company £450,000 following conviction for health and safety breaches.  Leyland SDM Ltd (LSDM) had been in the process of redeveloping a warehouse in Wembley when four workers fell more than three and a half metres down from a working platform. Two workers broke their legs in the fall and another suffered a broken collar bone, among other injuries caused by the incident. A Health and Safety Executive investigation found LSDM failed to manage the risks when working at height and carrying out the lifting operation. The company was fined £450,000.

Why do we tell you this? It is all about the risk management process, and all IFA firms by using our Bat Software are automatically risk assessing their practices, through the KPIs shown under the SUPERVISION tab. The annual audit conducted by our audit team is also a risk assessment that will be used in your defence.


Diary dates
2 March 2017 – Self Assessment tax for 2015/16 paid after this date will incur a 5% surcharge.
5th April – Usual CGT window dressing required.
5th April IP14 & IP16 Individual protection deadline for 2014 and 2016 individual and fixed protection. There is protection available for those who exceed the £1.25m current limit. You need the information from the schemes so time is running out, albeit you apply online. This is for people who started taking benefits before April 2006 and haven’t crystallised benefits since then, or crystallised recently at lower rates. People in defined benefit schemes will be particularly impacted. If you have enhanced or primary protection then this of course doesn’t matter.


SJP accounts show adviser losses

Page 16 of the accounts reads…
“a net cost of £106.7 million (2015: £84.2 million) has been incurred to attract the £11.35 billion of gross new funds (2015: £9.24 billion).”

This loss is obviously not the advice fee paid separately to the product. No.  The £106m loss each year is paid from ongoing product charges of in force policies. The customer defacto doesn’t get to see this on their fee disclosure.  So that makes two fingers to the FCA. One for the RDR ban on commission and one to the inducements ban.  It is not in tune with a fee paying advice sector, but it is where we are. The trick is vertigal integration. And that for IFAs means Go DFM.  You can be like SJP too!  Subsidise losses in one part (sales side) with profit in another. That is the only way to make scaled advice-sales pay in an era of heavy regulatory costs. 

IFAC help with the fairly regular traffice of IFAs going DFM each year.   DFM builds value in your practice and will boost your sale value many times over.  


Compensation levels soar
The Association of British Insurers (ABI)are up in arms about the increase in compensation awards that will increase premiums for insurance, particularly in the vehicle and medical claims sector.  On Wednesday 2nd March the Ministry of Justice said that the discount rate to be used in assessing personal injury claims would change this month to -0.75% from +2.50%.

The interest rate is derived from the Ogden Actuarial Tables and reflects the current real yield on 5 year index -linked gilts which is  -1.7%.  Hardly a surprise then, and with gilts at near zero, the annoucements could have been worse.  Then now need to amend the statutory rate of interest for compensation which remains at 8% plus Bank of England Base rate and is used in most FOS calculations.


Regulatory fines worldwide hit £321bn post credit crunch
That makes 50p for every human being alive today.

FCA clarifies definition of financial advice
On 28 February 2017, the FCA published https://www.fca.org.uk/firms/financial-advice-market-review-famr/changes-regulated-activities-order a summary of the implications for regulated and non-regulated firms of HM Treasury's decision to amend the definition of regulated advice.  The amendment means that most regulated firms will be exempt from the need to hold a permission to advise on investments unless the firm is providing a personal recommendation.  This exemption is designed to reduce the risks of firms carrying on a regulated activity without the correct permission. It is intended that this will give regulated firms more confidence to provide consumers with information to make their own financial decisions.
The FCA clarifies what this means for the following types of firm:

  • Regulated firms that do not hold the advising on investments or agreeing to advise on investments permission(s), but do hold another permission, will be able to provide advice on financial products and services without the advising permission. However, they will still need to seek the advising permission(s) if they want to provide personal recommendations.
  • For unregulated individuals and firms that are not authorised by the FCA there is no change. They will not be able to provide any form of regulated advice without authorisation.

The FCA confirms that firms do not need to take any action for the time being, and that firms will not need to re-apply for existing permissions for advising on investments or agreeing to do so.

For unregulated firms, the existing wider RAO definition of advice as “advising on investments” will remain in place. This means that unregulated firms will not be able to provide the more detailed and tailored guidance on the merits and disadvantages of investment products, and will be limited to providing factual information about products.  Hargreaves Lansdowne has thrived on this over the last twenty years – regulated advice that isn’t a personal recommendation.


FCA "Dear CEO" letter to firms operating loan-based crowdfunding platforms

On 28 February 2017, the FCA published a "Dear CEO" letter to firms that operate loan-based crowdfunding platforms to highlight that if a lending business borrows through a platform and then lends that money to others, it may be accepting deposits.

In the letter, the FCA explains when a lending business will need the accepting deposits permission.
Firms must forward details of the actions taken under the above, including nil returns, to the FCA by 14 March 2017. The information should include the details of firms that a firm has concluded as accepting deposits without the correct permission.
Two interesting points come out of this:

  1. FCA request for firms to shop other firms which is a growing trend.
  2. In my experience, most personal loan lenders that started post banking crash do exactly this – accept deposits under this clarified definition in order to lend the money back out.

Regulation always drives people outside the perimeter. The same happened with the UCIS ban. It has left the IFA sector and exploded into the Fund management sector – about a quarter of all funds now invest in so called alternative assets.

FOS loses in High Court
Judge Jay in the High court overturns FOS decision
Aviva took a FOS decision to review at the High Court. This costs £154 application fee to the HM Courts.  IFAC filed one last year and we also succeeded – except out of court, which is even quicker.  FOS threw their hand in straight away.

It was a really simple case of non disclosure. The life insurance applicant was seeing his GP and being referred to specialists at the time of making an application. Within a month of the policy start date a claim was made. Judge Jay said that a claim under the policy was a certainty, and therefore Aviva was right to reject the claim. But that is not what the case is about.

What is key is that the FOS can be unfair. No surprises there.  They do not need to determine cases exactly in accordance with the law. However the ombudsman is required by DISP 3.8.1 to take into account the relevant law, regulations, regulators' rules and guidance and standards, relevant codes of practice and, where appropriate, what he considers to have been good industry practice at the relevant time. He is free to depart from the relevant law, but if he does so he should say so in his decision and explain why.

FOS lost because they did not explain why they was departing from the rules and principles set out in governing law and practice.   This is what Judge Jay said:
"I do have personal concerns about a jurisdiction such as this which occupies an uncertain space outside the common law and statute. The relationship between what is fair and reasonable, and what the law lays down, is not altogether clear…who, or what, defines the contours and content of fairness and reasonableness? "


FOS wins in the High Court

On 24 February 2017, the High Court rejected an application made by Full Circle Asset Management Ltd (FCAM) for judicial review of a decision of the Financial Ombudsman Service (FOS). The FOS had upheld a complaint made by one of FCAM's clients, Mrs King, who argued that FCAM had provided her with a portfolio of investments that were unsuitable for her. Mrs King had agreed to take on a "medium" level of risk in her portfolio. 
FCAM relied on a S166 Skilled Persons report that said that their medium risk portfolio was suitable for a medium risk investor. FCA were happy enough with that, but FOS disagreed, and found against the investor.


Bat - DEFAQTO research
After putting more pressure on Defaqto, we have reduced the price of their research to just £50 per month for a full filtering research system as part of the Bat
IFAC strongly recommend this for IFAs as a stable way of troping audit trails, Defaqto Helping advisers deliver compliant, professional and efficient advice through comprehensive research, panel support and unbiased insight.


from the IFAC team

Charlie Palmer, John Downs, Mark Ellis, Andy Smith, Alastair Frame, Dan Rey, Ken Baksh, Martin Odell and Nick Hall.

All news