During this unprecedented period, how has the Financial Conduct Authority reacted and what does it expect of advisory firms?
The Financial Conduct Authority (FCA) was reasonably swift in coordinating its response to the coronavirus pandemic and soon had a dedicated area on its website (www.fca.org.uk/coronavirus) to provide information for firms and consumers. In many respects, it has taken a sensible, pragmatic approach, recognising the difficulties firms are facing, while balancing this with the need to maintain consumer protection.
Senior Managers and Certification Regime (SM&CR)
One of the main areas the FCA highlights is firms’ senior managers’ responsibilities – a core part of SM&CR. This is a further indication of the FCA’s focus on the way firms operate and how firms demonstrate they are professional at a firm level in addition to being professional at an individual adviser level.
It talks about some practical steps firms need to take. The overarching requirement is for a firm’s senior managers to take responsibility for the risks in their areas of responsibility and to consider what new risks may arise and how existing risks may be affected, along with the controls used to manage them.
The FCA does not require firms to have a single senior manager responsible for the coronavirus response but firms should allocate these responsibilities appropriately. This risk management and mitigation process is something you should be undertaking explicitly in relation to the pandemic. The FCA also offers some additional flexibility and simplification if firms need to cover absences or change senior manager responsibilities in direct response to the pandemic, including furloughing a senior manager.
In the FCA’s words, it “expects firms to be taking reasonable steps to ensure they are prepared to meet the challenges coronavirus could pose to customers and staff”
Defined benefit transfers
It appears that the supervisory work on defined benefit (DB) transfers is continuing, although the policy statement following CP19/25 that was due in Q1 has been deferred until Q2 or Q3 2020. This deferral is useful as changes to firms’ advisory processes would be an unwelcome imposition at this time.
However, the FCA has issued some guidance on advising clients on DB transfers in the current climate. It reminds firms about the need to give suitable advice and gather adequate know-your-client information to be able to do so; and that there are no shortcuts if it is difficult to get this information.
The FCA also flags that firms should:
- Not assume that changes in circumstances due to the coronavirus make a transfer more likely to be suitable for some clients.
- Address any misconceptions clients may have as a result of the crisis – for example, clients thinking “cash-equivalent transfers (CETVs) are at an all-time high” (this may also apply to some advisers).
- Not assume that increases in CETVs automatically improve client outcomes if a transfer proceeds; suitability is down to the individual client’s needs and circumstances.
- Not necessarily consider death benefits will be better in a defined contribution scheme – this should be assessed and alternatives considered.
10% fall notices
Discretionary services must notify clients where there is a 10% fall in the portfolio from its last periodic statement. Although you may not hold discretionary permissions yourself, if you recommend clients use discretionary services, including managed portfolio services, then the chances are you will need to forward these notices to clients (within 24 hours), particularly if they are held on a platform.
The FCA has introduced some supervisory flexibility around these notices until the end of September. However, the easement applies if the client has received already received a 10% fall notice in the current reporting period. As this easement came out in early April, for many a new reporting period started on 1 April, so firms would still need to send out a further 10% fall notice despite the clients getting one or more notices in Q1. It is only after the clients have received a further notice that the easement applies.
There are some other changes and flexibility:
- Anti-money laundering: The FCA is clear that firms still need to comply with client identity verification but has suggested some options such as accepting scanned documentation sent by email and asking clients to submit ‘selfies’ or videos, then seeking additional verification once the restrictions on movement are lifted.
- Reporting: If firms experience difficulties in submitting their regulatory data, they should maintain appropriate records during this period and submit the data as soon as possible.
- Assessing Suitability Review 2: This review started in Q1 but has been put on hold for the time being.
It is important to note that this is a summary of some of the flexibility introduced by the FCA. Where you are making use of any of these, please make sure you read the detail in the coronavirus section of the FCA website (it’s not long), as there are usually additional steps you need to take. First and foremost, this is about good management of your firm and doing the best you can under the circumstances. In the FCA’s words, it “expects firms to be taking reasonable steps to ensure they are prepared to meet the challenges coronavirus could pose to customers and staff”.
Rory Percival of Rory Percival Training & Consultancy Ltd