Financial Services Video Scripts

Script 1 – Threshold Condition 4 assessment

One of the Financial Conduct Authority (FCA)’s Threshold Conditions is: “The resources of A [the firm] must be appropriate in relation to the regulated activities that A carries on or seeks to carry on.” The threshold conditions are the basic criteria that all firms must meet in order to be authorised by the FCA.

When considering the level of resources that is appropriate for your firm, you should not just consider your financial resources. The FCA considers that all of the following come under the definition of ‘resources’:

  • the knowledge and competence of staff

  • the firm’s fixed assets – premises and fixtures and fittings

  • the insurance cover the firm holds

It is recommended that your firm reviews its level of compliance with the threshold condition relating to resources at least annually, and that a formal report on this review is produced. Here we will look at what should be included in such a report.

Executive summary

The report should start by summarising the key factors involved in the resources assessment. These may include:

  • The amount of profit the firm made in the last year
  • The firm’s performance against the FCA’s Capital Resource Requirement*
  • The regulated activities your firm carries out, e.g. Lending, Debt Management, Mortgages, Investment, Insurance
  • That you recognise the value of your non-financial resources and have a motivated, loyal and knowledgeable staff
  • That your firm regularly reviews its Disaster Recovery/ Business Continuity Plan
  • That you have regular compliance audits from a compliance consultant

*=The capital resource requirements for firms are as follows:

Insurance and mortgage intermediaries –

  • The greater of £5,000 or 2.5% of annual income (if you do not hold client money)

  • The greater of £10,000 or 5% of annual income (if you hold client money)

  • £50,000 (if you hold client money in a non-statutory trust)

Mortgage lenders and administrators –

  • The greater of £100,000 or 1% of total assets (plus undrawn commitments less loans excluded by MIPRU 4.4.4R in the FCA Handbook, plus intangible assets) (if you show the assets the firm administers on the balance sheet)

  • The greater of £100,000 or 10% of annual income (if you do not show these assets on the balance sheet)

(The annual income figure here should relate only to your income from regulated activities, should your firm also carry out activities not regulated by the FCA).

Capital adequacy rules for firms engaged in investment activities will come into force in 2015.

Trading performance

Comment on your firm’s performance against the budget, target or business plan, using the firm’s last set of accounts/financial results

If performance is above target, comment on the reasons for this and your future plans.

If performance is below target, give an explanation of the reasons why this is the case, and any corrective action you intend to carry out as a result. Extenuating circumstances that could lead to the firm being below budget might include the costs of acquisitions made during the year.

Quality of financial assets

The report should provide an overview of creditors and debtors. It should break down those debts into the following categories: those which are not yet due, those between 0 and 30 days overdue, those between 30 and 60 days overdue and those more than 60 days overdue.

Comment on what action has been taken by your firm to recover debts, and summarise the firm’s policy for collection of premiums.

Comment on how client money is handled and on any audit that has taken place relating to this subject.

Comment on your last RMAR submission. Did this show a capital excess or a deficit? If it showed a deficit, what action has been taken?

A copy of your firm’s balance sheet should be attached to the report.

Non-financial resources

Your firm should have a comprehensive Disaster Recovery/Business Continuity Plan, and guidance on the format of this is available in a separate video dedicated to that topic.

In this section, you should comment on human resources matters such as:

  • Your staffing levels
  • Their experience
  • Your level of staff turnover
  • Your recruitment process
  • Statistics on staff satisfaction levels – information on this can be gathered from appraisals, surveys, one-to-one meetings etc
  • Staff training you carry out
  • Any recent significant appointments

You should also summarise your IT provision. What type of system do you use? Are your IT arrangements suitable for the activities you carry out? What back-up systems and security measures do you have in place?

Next, add some comments about your business premises. Are they suitable for the required purpose? Will they remain suitable if you are contemplating expansion or acquisition. If applicable, what is the length of your lease, and does this have an impact on strategic planning?

Finally, you should summarise the insurance cover you have in place. We will look specifically at the subject of key person insurance in the next topic.

Risk assessment

This may perhaps be the longest section of your report into your resources. All firms should consider risks which may affect their business. Good practice is to consider both the likelihood of an adverse effect occurring and the severity of the impact should that event occur. By multiplying these two factors together, you can assess which are the largest risks you face. However, for all identified risks, both large and small, you should consider how you can minimise the chances of the adverse event occurring and/or how you can lessen the effects on your firm if it does occur.

Customers –

Are you reliant on one or more major customers for a large part of your income? You should comment in this section of the report on total income earned in proportion to overall income of, say, your largest two customers. Would the loss of such clients result in cost savings needing to be made? If you would need to consider making an employee redundant, does your contract of employment cover redundancy? If so, what would be the saving on salary and what is the net cost to the firm? How does this affect the firm in maintaining its solvency requirement?

If an important customer actually goes out of business, then all of the above could apply, but there may be the added possibility of bad debt. Is this mitigated by premiums being arranged on some sort of finance arrangement, where the onus of collecting the debt remains with the finance company?

Key employee –

You should consider if your firm has any one employee who either has a significant financial investment in the business or controls a large proportion of the book of business. Would the loss of this employee put a financial strain on the firm and your ability to maintain the required solvency level?

If you genuinely believe that there is no employee who enjoys this level of importance, then this can be stated in the report.

If you do have one or more employees who fall into this category, then name them in the report, and give details of key person insurance taken out, or other measures taken.

The loss of a key employee should be one of the possible incidents covered by your Disaster Recovery/Business Continuity Plan.

Providers –

Consider whether you are heavily reliant on one provider or platform. If a provider were to withdraw from a particular market, is your firm well-placed to find alternatives? In this section, you might mention who your largest account is with, and state the percentage of business you hold with them in relation to your overall account.

Client money –

If you do not handle client money, then a simple statement to this effect will suffice.

Otherwise, you might like to give details of your policy in this area. It is likely that one of these three scenarios will apply:

  • Your firm handles client money in accordance with the Client Assets (CASS) section of the FCA Handbook. Give details of internal and external audits carried out.

  • Your firm handles client money on a Non-Statutory basis

  • Your firm does not have client money handling permissions, and this is handled on your behalf by a third party on a Non-Statutory basis. An annual audit of the account is carried out by this third party.

Wider economy

Adverse economic conditions can have an impact on firms across all business sectors. You should consider the impact that the wider economy might have on your business model.

Loans

Either state that the firm has no loans, or give details of the subordinate loans you do have, and explain that these loans have been drawn up within the guidelines set out in MIPRU 4.4.7R – the section of the FCA Handbook that relates to subordinated loans.

Liabilities

State whether you have any pension liabilities, and if so how they are covered.

Investments

State what investments, if any, are made by the firm, and give details of how you monitor the value and performance of these.

Foreign currency

If any of your business involves dealings in a foreign currency, state how the foreign exchange exposure is managed and mitigated

Acquisitions

State that before considering an acquisition of a firm, or book of business, that you would assess the likely impact on both financial and non-financial resources, including whether you have the necessary staff resources and business premises to cope with an expanded business operation.

Conclusion

Maintaining adequate resources is one of the threshold conditions, i.e. it is one of the basic criteria your firm must meet in order to remain authorised by the FCA. It is also a complex and wide-ranging area, and whilst this video should have given you an insight into some of the factors to consider, seeking external help with this topic is highly recommended.

Script 2 – Business Continuity & Disaster Recovery

Why is it important to have a plan?

It is important from both a commercial and a regulatory point of view that you have systems in place to cope should an incident occur which prevents you carrying out business as usual. As a key person within a firm, you may be thinking about continuing to bring in revenue, while the Financial Conduct Authority is more concerned about how you manage and mitigate risks caused by the incident, and how you can ensure your customers can still receive service.

What might go wrong?

Examples of incidents that may prevent business being carried out as usual include:

  • Theft

  • IT systems failure

  • IT security breach

  • Fire

  • Other incidents preventing access to your firm’s offices

  • Weather events

  • Utilities failure

  • Loss of a key person within the firm

What should you do now to prepare for a possible incident?

Remember that an incident could happen at any time. The longer you delay putting a Disaster Recovery Plan in place, the greater the chances of an incident occurring for which you have no strategy for dealing with.

Ensure that a Disaster Recovery Committee is put together – think now about who would be best for such a committee – and ensure that this committee meets as soon as possible after any incident.

A procedure should be put in place as to who will be responsible for what tasks should an incident occur. Ensure that they are fully trained as to what they need to do, and train another person as a back-up, should the allocated individual be unavailable at the time. The worst incidents can result in personal injury, or worse, to your key staff, so you cannot assume that everyone will be available to assist with the recovery effort.

As soon as one member of this committee leaves the firm, ensure that the plan is updated accordingly.

Your procedures should also set out the limits of each committee member’s authority in the event of an incident. A moment of crisis is not the best time for one person to act beyond their authority without consultation.

The extent to which you need to be prepared for an incident depends in some ways on the size of your firm. The largest firms will probably have an empty office somewhere, ready for them to move in immediately should they be prevented from carrying out business from their usual location. Larger firms may also have stockpiles of stationery and equipment ready to use from a new business location, and may be better placed to employ security guards. If you are a small firm, it may not be necessary, or feasible, to have these measures in place, but ensure that you know who to contact if you need an office at very short notice.

However, simple measures that firms of all sizes can take include:

(Insurance)

  • Ensuring appropriate insurance is in place – buildings insurance, employer liability insurance, key man insurance, insurance against security breaches – and ensuring this insurance is renewed immediately upon expiry

(Your staff)

  • Training staff on what to do if a fire or other incident occurs whilst they are in the office

  • Obtaining emergency contact details, e.g. next of kin, for all staff

  • Giving staff access to internal systems from their home addresses, or anywhere else where they may be able to obtain internet access

  • Giving staff access to email and internet via smartphones, tablets etc

(Document storage)

  • Copying key documents which are held in paper form, and storing these off-site, e.g. at the home addresses of key personnel.

  • As far as possible, creating a paperless office, where as many documents as possible are held in a secure electronic system and as few as possible are held on paper

(IT security)

  • Installing a firewall and virus checking software on your computers

  • Protecting your computer by downloading the latest patches or security updates.

  • Only allowing staff access to the information they need to do their job and not letting them share passwords

  • Taking regular back-ups of the information on your computer system

  • Using a strong password for logging in to computer systems – these are long (at least 7 characters) and have a combination of upper and lower case letters, numbers and special keyboard characters like the asterisk or currency symbols

  • Changing passwords regularly

  • Carrying out tests of your IT security measures

  • Disabling access to systems of former employees immediately upon them leaving the firm

(Security of premises)

  • Assessing the power capacity of your office, so that you don’t have a blowout when a new appliance is turned on

  • Checking the physical security of your premises – burglar and fire alarms; door, cabinet and window locks; shutters; door entry systems

  • Changing codes on alarms and door entry systems regularly

  • Using fire-proof cabinets

  • Locking everything up before you leave – drawers, filing cabinets, windows, the office itself

  • Ensuring employees who leave the firm hand in their keys, security passes etc on their last day

(Loss of key personnel)

  • Carrying out occupational health screening of key personnel

  • Putting a plan in place as to how the duties of a key person would be allocated if they were suddenly unavailable

(Financial measures)

  • Maintaining an ‘emergency fund’ – a cash deposit of a suitable size that can be used for the costs of dealing with an incident

If in doubt as to what measures may be required, seek help. For example, your IT services provider should be able to help with IT security matters.

For fairly obvious reasons it is no good if the only copy of your Disaster Recovery plan is held in your office! Ensure that a copy is also held at the home address of at least one of the firm’s key personnel.

Weather planning

Of the possible incidents listed at the start of this presentation, a weather event is perhaps the only one for which you might receive any advance warning. If adverse weather is forecast, pay attention to any advice being given by the forecasters or the authorities; and think about what you might do if the weather is as bad as they say it will be.

What would you do if:

  • The power failed?

  • Access to the office was not possible?

What steps can you take when an incident occurs?

Ensure that your Disaster Recovery Committee meets as soon as possible after the incident.

Depending on the nature of any incident, it may be appropriate to take some or all of the following steps:

  • Assess the extent of the incident

  • Contact the emergency services

  • Open a log of actions taken to deal with the incident, including the costs of taking these actions

  • Make your premises secure and safe

  • Find a new office location

  • Get telephone calls re-directed to a new location

  • Get emails and post re-directed to a new location

  • Make plans to get staff to a new location

  • Communicate with your staff as to what has occurred, and on how the firm will operate in the meantime

  • Provide information to customers and the general public

After an incident has been dealt with, you should review your Disaster Recovery Plan to ensure that any lessons learnt from dealing with the incident are incorporated into the Plan.

As part of your Disaster Recovery Plan, you should put in place a list of contacts who you may need to inform should an incident occur. These may include:

  • The emergency services

  • Your insurers

  • Your landlord

  • The provider of your alarm system or other security measures

  • Your IT services provider

  • Providers of office premises

  • Utilities providers

  • Maintenance personnel, e.g. electricians and joiners

  • Providers of office stationery and equipment

  • Your regular suppliers of goods and services

Conclusion

No one likes to think about things going wrong. But accidents, disasters and criminal incidents do occur, and by planning in advance, you can be best placed to mitigate the effects when something does occur.

Script 3 – Client Money – Debt Management Firms

Many firms never handle client money, but those who do need to observe the highest standards to ensure that the money they are entrusted with is protected and is handled correctly. Principle 10 of the Financial Conduct Authority (FCA)’s Principles for Business reads:

A firm must arrange adequate protection for clients’ assets when it is responsible for them.”

Debt managers may frequently need to hold client money, as funds are often entrusted to them for distribution to creditors.

What is client money?

Receiving an advice fee via cheque or direct debit does not constitute handling client money. Essentially any monies paid which are due to a firm and which are paid into the main company bank account are not client money. But receiving money, whether in cash, cheque or electronic form, in connection with the debt management activity itself does count as handling client money.

FCA Handbook

The detailed rules on handling of client money are set out in the Client Assets sourcebook of the FCA’s Handbook. Chapter 11 of CASS refers specifically to debt management.

Large and small debt management companies

Firms must first determine whether they are a large or a small debt management company for the purposes of client money handling. ‘Small debt management firms’ are those who never held more than £1 million of client money at any point during the previous calendar year. Those who held £1 million or more at some stage, even just for one day, are regarded as ‘large debt management firms’.

Any firm which did not hold any client money during the previous calendar year, but which expects to during the current year, should classify themselves as a large or small firm based on the highest amount of client money they predict they will hold during the year.

Small firms can elect to be treated as larger firms for the purposes of client money rules though, although the FCA can object to a firm making such an election.

Notifications to the FCA

Debt managers who hold, or who expect to hold, client money are subject to strict requirements as to when they must notify the FCA:

  • Any firm which held client money during the previous year must inform the FCA, no later than the 15th business day of January, of the highest client money amount they held at any point during the year just passed

  • Any firm which did not hold client money during a particular year, but who expects to do so during the following year, and knows that this is likely prior to the 15th business day of January, must also inform the FCA by the 15th business day of January. In this case, they would notify the regulator of the highest amount they expect to hold at any point during the year just started.

  • Any firm which realises after the 15th business day of January that it expects to hold client money during that year must inform the FCA of the highest expected amount no later than the business day prior to the day on which they expect to start handling client money

Oversight of client money activities

All debt managers who hold client money must appoint a director or senior manager to oversee compliance with the client money rules. The rules surrounding this are slightly different depending on whether the firm is a small or large firm according to the criteria we saw earlier:

  • Small firms, other than not-for-profit bodies, must appoint a director or senior manager who holds a significant influence function

  • Small firms who are not-for-profit bodies must simply appoint a director or senior manager

  • Large firms, whether they are a profit-making body or not, must appoint a director or senior manager who has been approved by the FCA under their approved persons regime.

Acknowledgement letters

It is expected that client money is normally placed in one or more bank accounts designed for this purpose. No funds which meet the definition of client money can be placed in the firm’s main bank account. Once client monies have been placed in a bank account, the firm must complete and sign a ‘client bank account acknowledgement letter’ which clearly identifies the account being used, and send this letter to the bank. The bank should then indicate its agreement to the terms of the letter by countersigning and returning it.

The letter must follow the layout of the template letter in Annex 1 R of Chapter 11 of the CASS sourcebook.

A new letter will be required whenever any of the parties to the account, including the client, change their address or any other key personal information changes. All letters must be retained for five years from the date on which the client account it relates to is closed.

Paying in new client monies

All client money received must be paid into the client account by the end of the following business day at the latest. If cash or cheques are held overnight before being paid in, reasonable security measures must be taken. If a client withdraws from a debt management plan, all monies held on their behalf must be returned to them within five business days.

Payments to creditors

When client money is received which is payable to a particular creditor, these funds must be advanced to that creditor as soon as is practical, unless the firm has a contract with the client which allows funds to be retained for more than five business days. In these circumstances, the firm must expressly highlight this to the client, and explain the risks involved.

Unless such a term exists in a client’s contract, on every occasion that a debt manager is unable to make a payment to the creditors within five business days, it must inform the client and the creditor, and explain the risks arising from this situation to the client. Unless the reason for the delay is beyond the firm’s control, appropriate financial compensation must be paid to the client to put them back in the position they would have been in had the delay not occurred. This compensation amount should include an allowance for any interest payable.

Record keeping

A firm is required to keep comprehensive records of its handling of client money. Firms must always be able to distinguish money held on behalf of one client from money held for another client, and must also be able to distinguish client money from the firm’s own money.

Regular internal reconciliations must be carried out, where a firm ensures that the sum total of the balances of all the client bank accounts is equal to the amount of money that should be in these accounts. A large debt management firm must do this at least every five business days. Any discrepancies should be rectified by the end of the following business day by paying sums into the client accounts or withdrawing funds from the client accounts, as applicable.

Large debt management firms must also carry out external reconciliations, which must be conducted at least as frequently as the internal reconciliations. External reconciliations involve comparing the firm’s own internal accounts and records with those of the banks where the client money accounts are held. Again, any discrepancies must be corrected by the end of the following business day.

The FCA will expect to be notified by any firm whose client money records are discovered to contain significant inaccuracies, or which fails to conduct a reconciliation as required, or which is unable to correct discrepancies identified during a reconciliation.

FCA action

The FCA has taken disciplinary action on a number of occasions against firms who failed to maintain high standards in this area. Now that they are also regulated by the FCA, debt managers who fail to follow the rules can also expect action to be taken against them. Previous FCA sanctions for client money failings include a £120,000 fine for Xcap Securities in June 2013, for failing to segregate client money, inadequate record keeping in this area and not carrying out adequate reconciliations; and a £900,200 fine for SEI Investments (Europe) Ltd in November 2013, for failings in reconciliations and staff training regarding client money.

Conclusion

Firms who handle client money must never forget that it belongs to the client, not to them. They must have rigorous systems in place for ensuring that such monies are adequately protected and that the rules in this area are followed.

Script 4 – Regulatory Business Plan

A Regulatory Business Plan should contain details of the compliance arrangements and the systems and controls you have in place. Here we look at some of the things you might like to include in your firm’s Plan.

Executive Summary

Details to be provided in this section include:

  1. When the firm was founded.
  1. Who the firm was founded by, and its evolution over the years, for example did it start as a sole trader and then become a limited company?
  1. The names of the directors and shareholders
  1. The types of business written, for example general insurance, loans, mortgages or investments
  1. A statement on your business philosophy, for example you might state that you always seek to satisfy customer needs and deliver exemplary service, with the objective of retaining customers and developing your book of business by recommendation and reputation.

History and Background

  1. Give more details of the history of the firm. You may wish to mention the career history of the key personnel prior to forming or joining the firm and the roles they carried out, noting any professional qualifications achieved. If the firm is newly established, details should be given of the proposed controllers, including their current business activities and their intended commitment to provide financial support to the firm.

  1. Detail the percentage shareholding of each shareholder. Comment should be made on any person who holds a directorship or shareholding in another firm. Are there any shareholders who are not directors? Do any of the staff have an option to buy shares now or at a future date?

  1. State the number of staff you employ, and in what roles and whether they are full-time or part-time
  1. Give an overview of the firm’s compliance arrangements, including details of any services provided by an external consultant.
  1. Give information of any tranches of business, businesses bought or insurance books that have been sold or bought over the past three years, including details of the following:
  1. Date of sale / purchase
  2. Size of the book sold / bought
  3. Name of vendor / acquirer
  4. A description of the assets sold / acquired (e.g. in terms of goodwill, loan to value, credit quality etc
  5. The procedures followed in selling or acquiring a general insurance book

Activities

  1. Comment on the activities of the firm, such as transacting advised and non-advised sales in certain product areas. State any further regulated activities that you plan to start performing within the next 12 months.
  1. Give a detailed breakdown of your split of business, say between different general product areas, e.g. insurance, mortgages; and then give a breakdown of the split between different insurance contracts and different types of lending.
  1. Detail any current or intended practices for which the firm is authorised by overseas regulators, or which the firm conducts outside of the UK. Provide details of:
  1. The activity
  2. Its contribution to turnover
  3. The country (ies) where it is conducted
  4. The regulator(s) involved

Strategic Objectives

Outline the future business planning of your firm. For example, you might have plans to execute a particular marketing strategy, or for your staff to gain additional qualifications or skills.

Business Philosophy and Values

Outline what these are, remembering to build in things like Treating Customers Fairly and Contract Certainty. You might want to mention your compliance resources, the commitment of senior management and staff to TCF, and regulatory initiatives you have embraced such as the Retail Distribution Review and the Mortgage Market Review.

Strategic Rationale

Set out your plans for the immediate future. Here you should state if you have plans to acquire other firms, enter into joint ventures or take on appointed representatives. State that if any of these were to occur, you would make adequate provision for the servicing of existing customers.

Future Strategy

This section is concerned with your longer term plans.

Marketing

  1. Outline that you are aware of the FCA high level principle on financial promotions which requires that all marketing must be clear, fair and not misleading. Where possible, provide examples of marketing materials you may use
  1. Summarise your marketing strategy
  1. State that you do not have an aggressive marketing philosophy, and outline the steps you take to market the firm, e.g.:
  1. Recommendations from other customers
  2. Advertisements

  3. Technical articles

  1. Add that you review your marketing strategy regularly, and explain what steps are taken to ensure that your marketing material is compliant. Mention here that you use an external consultant if they are involved in the process of checking your promotional material.

  1. Cold calling is permitted in certain circumstances when marketing financial services. If you do this, give details of the safeguards you have in place, such as that staff making the calls identify both the name of the firm and their link with the firm, and that they give customer details of the purpose of the call as soon as possible. Explain how you ensure you do not contact customers registered with the Telephone Preference Service, or who have chosen not to receive marketing calls.

  1. State the regulatory information that you provide to your customers prior to conclusion of the contract, for example terms of business letter, personal illustration, policy summary, suitability report

  1. If your firm allows contracts to be concluded over the telephone, confirm that you have procedures in place for this, and that you provide the client with the required documentation immediately after conclusion of the contract.

  1. State that you have documented procedures for marketing practices in your firm’s compliance manual.

  1. Describe any trading or brand names that you use, for example ABC Brokers Ltd trading as Insure Direct.

  1. State the size of your marketing budget, and what this is projected to be in the next few years

Products

Give details of:

  1. The products that are offered to customers, including the historical development of the products (i.e. how they have evolved over time)
  1. What percentage of sales each product generates
  1. The firm’s product development process
  1. A summary of any products that are currently at the development stage, which are due to be launched within the next six months

Providers

Give details of the providers you use, i.e. are you whole of market or do you have a panel of providers, and if so which providers are included on that panel. State how you communicate to customers whether you offer an independent or a restricted service.

Suitability

Explain how you ensure that your customers receive suitable advice, such as that you gather comprehensive details of customers’ financial circumstances, needs and objectives; and then conduct comprehensive research into which is the best product and provider for their circumstances. Add that you would not make any recommendation if you are unable to access any products that would be suitable for a particular customer.

Explain that you send your customers detailed suitability reports or demands and needs statements, explaining what has been recommended and why, and giving details of the key features and risks of each product.

Financial Projections

You need to demonstrate that your firm meets the necessary capital requirements. Professional Indemnity Insurance is also a requirement and confirmation should be given that this is in place.

Details should be provided on the firm’s financial situation, including the following:

  1. A summary of key aspects of the Balance Sheet and Profit and Loss Account for the last three years
  1. Projections for the next three years, including details of any assumptions made (for example, a 5% increase in staff costs is assumed due to…) and a sensitivity analysis (for example, if sales drop by 10%, how does this affect profits?)
  1. A cash flow forecast for the next 12 months
  1. State whether you hold client money
  1. State what your capital resources requirement is, and how you measure up against this
  1. Either state that you are exempt from the need to have your accounts audited, or give details of what auditing is carried out.

Senior Management and Organisational Structure

Give details of your firm’s management structure by way of an organisational chart and responsibility table, highlighting:

  1. Personnel structure and reporting lines
  1. Executive and non-executive board members
  1. Staffing levels in each area of the business and the training policies in force
  1. What is typically on the agenda at management and/or directors’ meetings.

Key responsibilities of Senior Management

Give details of the key tasks of each manager or director role, and of what responsibilities they hold.

Monitoring

Explain the ways your operations are monitored. Give details of the main control committees and the structure of the main risk control areas.

A good addition to any compliance manual is a summary document outlining all of the compliance tasks that need to be carried out. These tasks could perhaps be listed in a table, with separate columns explaining how often each task needs to be conducted, and who has overall responsibility for that task.

State that your firm is aware of its responsibility under principle 11 of the FCA’s high level principles, and under SUP 15.3.1 to 15.3.10 of the Handbook, to inform the FCA of serious breaches. Add that you operate a breaches register for more minor errors, which you would rectify as a matter of course.

Recruitment and Training

Give details of the recruitment and training policies you have in place to ensure that all staff have the required skills, knowledge and experience. This may involve:

    1. Actively encouraging and supporting staff to attain relevant professional qualifications

    1. Conducting regular internal training, or sending staff to external courses and seminars

    1. Issuing all staff with a job specification which confirms their key performance indicators and the benchmark standards against which competency will be assessed.

    1. Details of your recruitment process and how you ensure the suitability of candidates for the role in question

Outsourcing and Agreements with Third Parties

  1. Give details of any agreements that are in place with regards to third parties, and explain how these operate:
  1. All processes that are currently outsourced, or you are planning to outsource, together with the rationale behind this move
  2. The steps that are in place to ensure good levels of customer service are maintained
  3. A contingency plan should the third party no longer be able to offer support at any stage in the future

An example of an outsourcing arrangement often used by financial services firms is engaging the services of a compliance consultant. State that as an authorised firm you recognise that you remain entirely accountable and responsible for your regulated activities.

Reviews

Conclude by saying that you review your Regulatory Business Plan at least annually.

Script 5 – Financial Crime (higher level)

Financial crime is a significant problem. It is estimated that the annual cost of financial crime to the UK economy is £40 billion, and the effect on the global economy is estimated at $2.1 trillion, according to a July 2013 speech by Martin Wheatley.

What is financial crime?

Financial crime can take many forms. Examples include:

  • Money laundering – where criminals attempt to conceal the origin of the proceeds of criminal activities by integrating the funds into the legitimate economy

  • Fraud – where money is obtained on false pretences

  • Bribery and corruption – where inappropriate inducements, financial or otherwise, are offered to take a particular course of action

  • Data security breaches – where criminals attempt to gain financially from obtaining personal details by illicit means

  • Financial sanctions – certain individuals have had their assets frozen in the UK and other territories as a result of terrorism activities or other crimes committed around the world

Financial crime can involve the proceeds of almost any crime, but some of the most common are: drug offences, theft, fraud, terrorism and gun running.

Especially in this electronic age, criminals are becoming ever more sophisticated, and the authorities need to respond by developing ever more sophisticated ways of dealing with these threats.

Legislation

Key UK financial crime legislation includes the Bribery Act 2010, the Money Laundering Regulations 2007, the Terrorism Act 2000, the Terrorist Asset-Freezing etc. Act 2010 and the Proceeds of Crime Act 2002

The role of the NCA

The principal organisation in the UK for tackling serious and organised crime is the National Crime Agency (NCA). The four ‘pillars’ of its activities are:

  • Pursue – prosecuting those engaged in serious and organised crime 

  • Prevent – preventing people from becoming involved in serious and organised crime

  • Protect – increasing the level of protection people enjoy against serious and organised crime

  • Prepare – reducing the impact of serious and organised crime where it has occurred

The FCA’s role

In its role as the main regulator of financial services, the Financial Conduct Authority (FCA) also has a significant role to play, as one of its statutory objectives is: “protecting and enhancing the integrity of the UK financial system.” It can initiate criminal prosecutions for individuals and firms suspected of participating in or facilitating financial crime, and it can impose fines and bans on individuals and firms that breach its financial crime requirements.

The FCA’s rules on financial crime can be found in SYSC 6.3 of its Handbook. These rules include:

  • The need to carry out an assessment of the financial crime risk the firm poses, and to document this

  • The need to have systems and controls in place in this area that are:“comprehensive and proportionate to the nature, scale and complexity of its activities”. (Smaller firms are not expected to devote as much resource to combating financial crime as larger ones, but no financial firm can afford to ignore this issue)

  • The need to regularly review these systems and controls

  • The need to provide staff with adequate training on money laundering issues

  • The need for the firm to appoint a senior person with sufficient knowledge and experience as a Money Laundering Reporting Officer, who will report to the Board of Directors or equivalent on money laundering issues at least annually

  • The need to verify the identity of all customers, but not to the extent that access to financial services is prevented for those who have genuine reasons for being unable to provide their identity

HM Treasury’s role

HM Treasury, the UK government department responsible for financial affairs, maintains a Financial Sanctions List of individuals whose assets have been frozen, which can be viewed on its website.

The Financial Action Task Force

In recognition of the fact that financial crime is often carried out internationally, the Financial Action Task Force seeks to co-ordinate efforts between different countries to combat financial crime. It maintains a list of countries where there is deemed to be a higher risk of financial crime occurring, known as high-risk and non-cooperative jurisdictions.”

The Joint Money Laundering Steering Group

The Joint Money Laundering Steering Group comprises several trade associations from the financial services industry, mostly those representing deposit takers, lenders and investment managers. It promotes good practice and gives guidance on interpretation of the relevant laws and regulations in this area.

Money laundering

As we have seen, money laundering is by no means the only type of financial crime that might be committed. However, it is perhaps the most likely way in which a financial advisory firm might be used to facilitate financial crime.

Money laundering is the process by which criminals attempt to disguise the origin of the proceeds of criminal activities. By creating a complex series of transactions, they aim to make it impossible to identify where the funds originally came from. The original proceeds of crime are often, but not always, in the form of cash, which criminals will probably not want to retain as it is cumbersome to handle in large quantities and is easy to trace.

The three stages of money laundering are:

(1) Placement

The proceeds of criminal activity are placed into the financial system or retail economy or are smuggled out of the country. The aims of the launderer are to remove the cash from the location of acquisition so as to avoid detection from the authorities.

(2) Layering

This is the first attempt at concealment or disguise of the source of the funds. The criminal tries to create complex layers of financial transactions, designed to disguise the audit trail and provide anonymity. It is also likely to be the first stage of the process at which use is made of a financial advisory firm.

(3) Integration

The final stage in the process. It is at this stage where the money is integrated into the legitimate economic and financial system. Integration of the ‘cleaned’ money into the economy is accomplished by the launderer making it appear to have been legally earned. By this stage, it is exceedingly difficult to distinguish legal and illegal wealth. For example, funds obtained from a financial provider upon closing an account or policy will appear to be ‘clean’ money even if the original source was ‘dirty’.

Money laundering offences include:

  • acquiring, using or possessing criminal property
  • concealing, disguising, converting, transferring or removing criminal property
  • handling the proceeds of crimes
  • being knowingly involved in any way with criminal or terrorist property
  • entering into arrangements to facilitate laundering of criminal or terrorist property
  • investing the proceeds of crimes in financial products
  • investing the proceeds of crimes through the acquisition of property or other assets

Summary of firms’ obligations

All financial services firms need to be aware of the possibility that they could be used to facilitate financial crime. They need to consider the financial crime risks that exist, and how these could be mitigated. All staff need to be trained on how to identify suspicious activity, and on what they should do in these circumstances. All firms need to appoint a Money Laundering Reporting Officer, who can then report suspicions to the NCA if appropriate.

What might go wrong in your firm?

Examples of situations firms could find themselves in include:

  • A rogue member of staff agrees to assist a criminally-minded customer in a financial crime activity, or seeks to defraud the firm itself

  • The firm is approached by a criminal seeking to deposit the proceeds of their activities

  • The firm is used by the criminal as part of their efforts to create a complex series of transactions, with the aim of disguising the origin of the funds

  • A security breach occurs, and the personal details the firm holds about certain customers are used by criminals for their own ends, such as to steal their identity or clear their bank account

  • A customer gives false financial details to the firm when making an application for a financial product, such as falsely stating income when making a mortgage or loan application

  • The firm is approached by a person who appears on a Financial Sanctions list

Examples of steps you might take to counter these risks might include:

  • Thoroughly vetting all new recruits, paying particular attention to any previous convictions or disciplinary action, or to any evidence that they might not be in a sound financial position

  • Giving comprehensive training to all staff on how to identify suspicious activity, and what they should do if they suspect it has occurred

  • Verifying the identity of all clients

  • For all clients, checking that they do not appear on the Financial Sanctions list

  • Taking all reasonable steps to ensure the data the firm holds is as securely protected as possible

  • Verifying any information supplied by a customer about their income or other financial circumstances – for example income can be verified via payslips, tax returns and company accounts

Conclusion

The issue of financial crime needs to be taken very seriously by financial firms. Any firm is potentially at risk from being used to facilitate financial crime, and any deficiencies in this area can have severe consequences. Not only might the firm suffer financially as a direct result of the incident, but you might also be subject to enforcement action by the FCA, or subject to criminal sanctions. The maximum penalty for direct participation in money laundering is 14 years in jail, while sentences of up to five years can be imposed for failing to report suspicions or for tipping off suspected offenders.

Script 6 – Financial Promotions

All of your promotional material will need to comply with relevant advertising codes of practice, and with the rules on this subject set out in the Financial Conduct Authority (FCA)’s Handbook. A handful of promotions will be regarded as exempt, such as those that only give the firm’s name, contact details and brief factual information, but otherwise the content of each promotion needs to be fully compliant.

Remember that the term ‘financial promotions’ does not just refer to advertisements. A telephone conversation or face-to-face meeting where a product or service is promoted is regarded as a ‘real time promotion’, and the content of your firm’s website, brochures and mailshots; as well as any items you post on social media, may also fall under the financial promotions rules.

As with any breaches of its rules, the FCA can take disciplinary action against firms whose promotional material falls short of the required standards. As well as breaches of specific rules, the FCA may find that a promotion breaches its Principle 7: “A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.”

Three of the FCA’s six Treating Customers Fairly outcomes also have relevance to financial promotions:

  • Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly

  • Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale

  • Consumers are provided with products that perform as firms have led them to expect

General principles

Some basic principles to be followed when promoting your firm include:

  • State the name of your firm in the promotion
  • Do not make false or unsubstantiated claims
  • When comparing your service to other firms or contracts, the promotion must do so fairly and objectively
  • Ensure that the promotion does not claim that either the promotion itself, or your firm, has been specifically approved by the FCA, Government etc. Use of the FCA logo is not permitted in any circumstances.
  • Where the FCA is named as a regulator on the promotion, and the promotion also refers to areas not regulated by the FCA, it should be clear which areas are FCA-regulated and which are not
  • The promotion should present information in such a way that it is likely to be understood by the average member of the group it is aimed at. Using complex jargon in an advertisement to the general public, without explaining the terms used, is unlikely to meet this requirement.
  • Take care that important information is not contained in smaller print, especially required warnings or information about the risks or disadvantages of a product or service. A fair reflection of the risks and must be given if potential benefits of the product are also stated in the promotion.
  • If you decide to refer to the Financial Services Compensation Scheme or any other compensation scheme applicable to the product in question, reference to these compensation schemes must be purely factual and not used to promote the product in any way.
  • Ensure that anyone who designs websites and other electronic media on behalf of the firm are aware of the difficulties that can arise when reproducing certain colours and printing certain types of text. These difficulties could cause problems with the presentation and retrieval of required information.
  • You need to take care not to make a cold call to anyone who appears on the Telephone Preference Service register, or to anyone else who has asked you not to contact them in this way. If you do make cold calls, the caller must clearly state their name and the name of the firm, make clear the purpose of the call at the outset, and seek the customer’s permission to continue with the call. Such calls should not be made at unsocial hours, and if you know a particular customer is a night-shift worker, the definition of unsocial hours might include normal office hours.

Investment firms

The FCA rules for financial promotions for investment and pension contracts include:

  • Where investment in the product will put a customer’s capital at risk, this needs to be stated. Many promotions use the phrase: “The value of your investment can fall as well as rise.”

  • An investment should not be described as guaranteed, protected or secure unless this is a fair reflection of the safeguards the product affords

  • Using performance data to promote an investment product is subject to a number of rules. If past performance data is used, a statement should be made that this is not an indication of future performance. Performance data should be given for the last five years, wherever possible, and data should only concern the performance in complete periods of 12 months. The source of the data must be stated.

  • Where indications are given of future performance, these must not be based on past performance. The projections must be based on reasonable assumptions, supported by reliable data. The promotion must prominently state that these are not reliable assumptions of future performance, and the effect of any charges or fees on the projected returns must also be stated.
  • Complex products such as derivatives, traded life policies and unregulated collective investment schemes should not be promoted to ordinary retail investors. These products are only suitable for high net-worth or sophisticated investors.

  • Some types of complex investment product should not be promoted via cold calling.

  • If reference is made to the tax situation on a particular product, a warning should be given that the precise tax implications for a particular customer will depend on the individual’s specific circumstances, and that this situation may change in the future

Insurance firms

The FCA rules for financial promotions for insurance contracts include:

  • Any claims relating to pricing, such as that your firm can provide the cheapest premium for a particular contract type, should only be made if you are confident you can provide this for the majority of people who respond to the promotion.

Mortgage firms

The FCA rules for financial promotions for mortgage contracts include:

  • Non real-time promotions, i.e. those not made during the course of dialogue or face-to-face contact, must give the firm’s name and postal address, or else give a contact point such as a telephone number or email address from where the address can be obtained
  • Where a promotion is issued which includes a comparison or contrast, ensure that you only compare contracts meeting the same needs or which are intended for the same purpose
  • You should not describe any fixed or discounted rate period without also stating the duration of any early repayment charges. The explicit wording ‘early repayment charge’ must always be used, so you cannot use alternative names such as ‘early redemption penalty’.
  • Similarly, alternative wording is not permitted for the terms ‘higher lending charge’ and ‘lifetime mortgage’

  • All promotions that are concerned with paying off unsecured credit by taking out secured credit should include the risk warning: “Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.”
  • Where the promotion contains price information, or suggests that credit may be available to customers who have found access to credit restricted in the past, the Annual Percentage Rate must be quoted
  • A prominent indication should be given of any fees to be charged for effecting the advertised product or service
  • The FCA’s key facts logo should not be used within a promotion unless it is specifically required by any rule

  • Cold calls must only be made to established customers to whom you have highlighted that such calls may be made.

Firms should note that if they offer FCA-regulated mortgage contracts then the financial promotions rules in the Mortgage Conduct of Business (MCOB) sourcebook will then apply to all loans they offer that are secured on land. Hence a mortgage lender or broker who also offers consumer credit will be subject to the MCOB rules on promotions for secured consumer credit, rather than the rules in the Consumer Credit (CONC) sourcebook. The CONC requirements will still apply to unsecured credit promotions though.

Consumer credit firms

The FCA rules for financial promotions for consumer credit contracts include:

  • Promotions must not imply or state that credit is available regardless of personal circumstances

  • Where debt solutions are promoted, the promotion must not make claims about the length of time in which a customer may become debt-free

  • Where claims are made that monthly repayments would be reduced under a particular credit agreement, these need to be accompanied by statements that the term of the debt and/or the total amount repayable would increase, where applicable.

  • The representative Annual Percentage Rate must be quoted whenever the promotion contains other price or interest rate information, provides an inducement to take out credit, suggests that credit may be available to customers who have found access to credit restricted in the past or suggests that credit is available on more favourable terms than with other lenders.

  • A promotion for high cost short-term credit, which includes payday lending, must prominently include the statement: “Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk.”

  • If the loan is secured on land or property, the promotion must include the risk warning:YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT”. If the loan is to pay off unsecured debts, an additional required warning is: “THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.”

  • Credit brokers must not describe themselves as independent unless they have access to a sufficiently large number of products to offer a product range that is representative of the whole of the market.

  • Debt counsellors and debt adjusters must not suggest that their service is free or that they are a charity or public organisation if they actually offer a commercial service

Financial promotions systems & controls

You must ensure that all staff who are responsible for designing and approving promotions are adequately trained concerning the rules in this area. To be on the safe side, many firms ask their compliance consultant to approve any promotional material.

Obviously, it is not practical to seek approval for many real-time promotions, which are made in the course of a conversation with a customer, but in certain circumstances it may be desirable to approve the sales script that the representative will use.

Approvals for promotional material should never be sought retrospectively. Ensure that you obtain approval before the promotion is issued, otherwise you will have breached FCA rules during the period for which the promotion was available if any issues are subsequently identified.

It is good practice to regularly review financial promotions, especially those that are used over an extended period of time. Not only can the rules relating to promotions change, but the regulatory interpretation of these can also alter, and a promotion which was viewed as compliant when issued may give rise to concern, say 12 months later.

You should maintain a Financial Promotions register, which for each piece of promotional material used, should give details such as:

  • The type of promotion (e.g. print, TV or radio advertisement; telephone promotion; face-to-face promotion; mailshot; brochure; website; social media posting)

  • The products or services the item promotes

  • The date the promotion was approved, and by whom, together with any details of amendments, corrections or deletions made during this compliance check

  • The date the promotion was issued

  • The date use of the promotion stopped, if applicable, for example the date you stopped making promotional phone calls or the date the advert stopped appearing in the media

  • The date of any occasions on which the promotion was reviewed, and the outcome of that review

As with any complaint your firm receives, ensure that complaints relating to financial promotions are analysed for systemic or common failures, and that relevant remedial action is taken.

Conclusion

All firms want to tell people about how good their products and services are. But there are strict rules to be followed as to the content and form of these promotions, and firms need to be aware of what is permitted and what is not.

Script 7 – Complaints

What constitutes a complaint?

All staff within a financial services organisation, from the chief executive to the most junior staff, need to know how to recognise a complaint, and what to do upon receiving it.

A complaint is defined as:

Any expression of dissatisfaction, whether oral or written, and whether justified or not, from or on behalf of an eligible complainant which alleges that the complainant has suffered (or may suffer) financial loss, material distress or material inconvenience.”

To clarify some of the terms used in this definition:

Whether oral or written’ – this means that complaints must be accepted in the format they are received, e.g. letter, telephone, fax, email, face-to-face, etc. You cannot ask a person who complains by telephone to put their concerns in writing before any action will be taken.

From or on behalf of’ – Complaints may be received from relatives, claims management firms, solicitors etc, and these must be handled in the same way as if the client themselves had made the complaint.

Eligible complainant’ – you should expect almost all of your firm’s clients to be eligible complainants, unless you regularly deal with larger companies as clients.

Financial loss, material distress or material inconvenience’ – the first of these is relatively straightforward, as clients often state in their complaints that they believe they have been sold the wrong product (mis-selling), or explicitly state that they believe they have lost money as a result of your firm’s actions. Material distress and material inconvenience are more subjective matters, but here consider whether the customer is alleging that the incident had any effects on their life other than financial ones. If in doubt, the matter should be treated as a complaint.

How should clients be informed of the complaints procedure?

Your initial disclosure documents, provided to clients at the start of each client relationship, should include the necessary contact details: postal address, email, telephone etc, for making a complaint against your firm.

When a complaint is received, a copy of your detailed complaints procedure should be sent to the client along with a letter acknowledging the complaint.

What should a complaints procedure include?

Your firm should have a documented complaints procedure, which needs to cover:

  • What the definition of a complaint is
  • How a complaint will be handled
  • Who has overall responsibility within the firm for dealing with complaints – this should be a senior manager who is competent to deal with complaints
  • Information about the Financial Ombudsman Service (FOS)
  • The record keeping requirements for complaints

Actions on receiving a complaint

If a complaint is received by telephone, then full details of the complaint should be written down by the member of staff who takes the call.

Regardless of the method by which a complaint has been received, the first thing to consider is – can the complaint be resolved quickly? For example, a client may complain that they have not received important documentation, and it may suffice simply to provide the missing documentation, along with an apology to the client.

In these circumstances you must still keep a record of the complaint and the action taken to resolve it.

In the event that the client does not accept the action taken to resolve the complaint, or the nature of the complaint is such that it cannot be resolved within this timescale, then the detailed complaints handling procedures will apply.

Here, the first step is to send an acknowledgement letter to the client within five business days of the complaint being received. The letter will inform them that your firm are investigating the complaint and that it will endeavour to complete the investigations within eight weeks. The letter should be accompanied by a copy of your detailed complaints procedure. It is good practice for the acknowledgement letter to include a summary of the complaint as your firm understands it – this will allow the client to correct any misunderstandings at an early stage – and a contact point for queries on the progress of their complaint.

Details of the complaint should be logged on your firm’s Complaints Register.

Investigating a complaint

Your firm should then investigate the complaint as fully as possible. The nominated Complaints Manager retains overall responsibility for this, but some of the work in this area may be delegated to other competent staff, especially in larger firms where complaints are a common occurrence.

Investigating a complaint may involve:

  • Reviewing all information held on file regarding the client
  • Interviewing the financial adviser and any other staff members who dealt with the client to get their recollections of the matter
  • Requesting further information from the client as to their recollections of their dealings with your firm
  • Listening to recordings of telephone calls between your staff and the client, if these are available

You should then make a decision, based on all available evidence, as to whether the client has suffered financial loss, material inconvenience or material distress. If you believe financial loss has occurred, you should offer an amount of compensation to the client which is sufficient to put them back in the position they would have been in had the incident which gave rise to the complaint not occurred. For example, if you decide that a product was mis-sold, it might be appropriate to refund all premiums paid under the contract, plus an additional amount for interest payments.

It should be noted that the burden of proof used in investigation of complaints is not equivalent to the ‘beyond reasonable doubt’ principle used in criminal courts. You should make your decision on the balance of probabilities, i.e. what is most likely to have happened, based on all available evidence.

Informing the client of your decision

Once these investigations have been completed, you should write a letter to the client, known as a ‘final response’ letter, setting out your decision, the reasons for the decision, details of the redress (if any) that is to be offered to the client, and details of the client’s right to refer the matter to the FOS.

Timescales

You should endeavour to complete your investigations within eight weeks of the date of receipt of the complaint. In the event that eight weeks after receipt, the investigations into the complaint have not been completed, you should write to the client explaining the reasons for the delay and explaining when you expect to have completed your investigations. Details should be provided at this stage of the client’s right to refer the matter to the FOS.

Complaints received about other parties

In some cases, you may receive complaints that you believe are either wholly or partly a complaint against another party, such as a complaint against the product provider, when your firm might instead be the adviser involved in the sale of the product.

If you believe that the entire subject matter of the complaint is a matter for another party, you should forward the complaint to that other party. You should also write a ‘final response’ to the client explaining that you believe that the complaint is a matter for another party. This letter should provide the other party’s contact details and give details of the client’s right to refer your firm’s response to the FOS.

Financial Ombudsman Service

The Financial Ombudsman Service (FOS) is the independent body set up by the UK Parliament to resolve complaints that consumers and financial firms haven’t been able to resolve between themselves.

The FOS will only consider complaints where the ‘final response’ letter has been sent, or where the firm has not completed its investigations eight weeks after receipt.

When you send the ‘final response’ letter, it must make the client aware of their right to refer the decision to the FOS. An FOS leaflet entitled ‘your complaint and the ombudsman’ must be enclosed with the final response letter. The same information must be provided if you are writing to the client to inform them that you have not been able to complete your investigations within eight weeks.

If the client refers the matter to the FOS, it will make its decision based on all available evidence, and may request additional evidence as required. The FOS will also not operate in the same way as a court of law, and will make its decisions based on what it believes is most likely to have happened.

If the FOS believes that a client has suffered financial loss, material distress or material inconvenience, it is likely to instruct your firm to pay an amount of redress to the client. The FOS can instruct firms to pay up to £150,000 in redress, although most complaints are likely to involve much smaller amounts.

In the event that your firm disagrees with the decision made by the FOS adjudicator, you have the option of an appeal to the Ombudsman himself. No further appeals procedure is available to you after this, and you must accept the decision made by the Ombudsman if the client also accepts it, and comply with the redress instructions.

In the event that the client disagrees with the decision made by the FOS adjudicator, they have the option of taking the matter to an appropriate court of law.

Apart from what the FOS says are ‘exceptional circumstances’, it will not adjudicate on complaints where:

(a) More than six months have elapsed between the date of the ‘final response’ and the date the client contacts the FOS.

(b) More than six years have elapsed since the date of the subject matter of the complaint, or if later, more than three years have elapsed since the client should reasonably have been aware that they had cause to complain.

You may therefore reject, without investigation, any complaint which falls outside the above timescales if you so wish.

Record keeping

You should keep copies of all correspondence relating to the complaints you receive. These should be kept for a minimum of three years from the date of receipt, in accordance with Financial Conduct Authority (FCA) requirements.

Information about the complaints received and how they were handled – numbers received, numbers upheld, redress paid etc – need to be included in your regular data reports to the FCA.

It is also important to keep records of complaints received so you can analyse them and learn from them. For example, is a particular product or service, or a particular adviser, attracting an unusually high number of complaints? You should try and identify the root causes of complaints and establish if there is a need for remedial or new training, a change of procedure or disciplinary action.

Script 8 – Financial Crime (specifics)

Tackling financial crime is a key part of the Financial Conduct Authority (FCA)’s remit. They help to protect market integrity by fighting financial crime. Their aim is to protect consumers and prevent firms from being used as a channel for financial crime.

What is money laundering?

Criminals have to find a way of making the money they get from their criminal activities ‘clean’. They try to launder their ‘dirty money’ by getting it into the financial system without detection or arousing suspicion. If they can get their ‘dirty money’ into the financial system they can then transfer it between different bank accounts or financial products in the UK or abroad, or use it to buy goods and services. The idea is to make the ‘dirty money’ look like it has come from a legitimate source. Criminals try to make it as hard as possible to connect the money with its criminal origins. This process is known as money laundering.

Money laundering can take place after any crime where there is a financial gain. Whilst it has traditionally been associated with proceeds from drug dealing, proceeds of theft, fraud and terrorism, for example, might also be laundered.

Money laundering offences can include:

  • acquiring, using or possessing criminal property
  • concealing, disguising, converting, transferring or removing criminal property
  • handling the proceeds of crimes
  • being knowingly involved in any way with criminal or terrorist property
  • entering into arrangements to facilitate laundering of criminal or terrorist property
  • investing the proceeds of crimes in financial products
  • investing the proceeds of crimes through the acquisition of property or other assets

The importance of maintaining impeccable standards in this area cannot be overstated, and the penalties for failing to follow the law are severe. The key legislation in this area is the Money Laundering Regulations 2007, the Terrorism Act 2000 and the Proceeds of Crime Act 2002.

The stages of money laundering

Proceeds of crimes are often in the form of cash, which can be easily traceable and cumbersome to handle when in large quantities.

Hence criminals take action to prevent this cash from attracting suspicion. For example they may move it to other locations, including abroad. They may also use it to buy other assets or try and introduce it into the legitimate economy through businesses with a high cash turnover.

The three main stages of money laundering activity are:

(1) Placement

The proceeds of criminal activity are placed into the financial system or retail economy or are smuggled out of the country. The aims of the launderer are to remove the cash from the location of acquisition so as to avoid detection from the authorities.

(2) Layering

This is the first attempt at concealment or disguise of the source of the funds. The criminal tries to create complex layers of financial transactions, designed to disguise the audit trail and provide anonymity. It is also likely to be the first stage of the process at which use is made of a financial advisory firm.

(3) Integration

The final stage in the process. It is at this stage where the money is integrated into the legitimate economic and financial system. Integration of the ‘cleaned’ money into the economy is accomplished by the launderer making it appear to have been legally earned. By this stage, it is exceedingly difficult to distinguish legal and illegal wealth. For example, funds obtained from a financial provider upon closing an account or policy will appear to be ‘clean’ money even if the original source was ‘dirty’.

Responsibilities of the Money Laundering Reporting Officer

The firm must appoint a senior manager to whom staff can report suspicions of money laundering activities. This individual is known as the Money Laundering Reporting Officer (MLRO). The MLRO must ensure that every employee is made aware of what may constitute suspicious activity, and the procedures for reporting this within the firm. Staff should receive formal training on money laundering, and it is recommended that this is repeated regularly, perhaps annually.

If the MLRO decides that a transaction is suspicious, then they must submit a Suspicious Activity Report to the National Crime Agency.

The MLRO must make regular reports to the company’s board of directors, or equivalent, on money laundering activity.

What might be suspicious?

The following occurrences may require you to make a report regarding suspicions of money laundering:

    • A customer who wishes to effect a transaction using cash, in circumstances when this would not normally be the case
    • A customer who seems reluctant to provide proof of identity, when you would expect the customer to be able to do so.
    • A customer who has a history of surrendering long-term investments after short periods.
    • A customer who is insistent upon effecting a transaction which appears to be of little or no benefit to them.
    • A customer who wishes to make a number of smaller investments instead of one larger investment, and their reasons for doing so are unclear.
    • A customer with an amount to invest that seems out of proportion to their income or their previous financial resources.
    • A customer who is reluctant to explain the source of the funds they wish to invest.
    • A customer who is acting on behalf of a third party without a satisfactory explanation for doing so, or who assigns policies themselves to apparently unrelated third parties.
    • A customer who is normally resident in or has strong ties to a country considered to pose a high risk for money laundering activity.
    • A customer whose identity documents show evidence of having been tampered with.
    • A customer who appears to be more interested in the short-term cancellation rates rather than the benefits of the policy
    • A customer who seems determined to enter into financial commitments well beyond their means

 

Money laundering will not necessarily involve large amounts of money. Bear in mind also that the person you deal with may not be the original criminal.

 

If the acceptance of cash is a regular occurrence for your firm, it is recommended that you set a limit for transactions based on what would be the norm for that type of regulated business. You should make staff aware of the amount of cash they are normally allowed to accept from customers. If the cash payments are above the levels set by the firm, senior management will then make a decision to either decline the risk or accept it on production of additional credible evidence of identity in proportion to the risk.

Verification of identity

This is the most common anti-money laundering requirement you are likely to encounter. The identity of all your customers must be satisfactorily verified.

Evidence of the document (s) you have inspected to verify identity should be recorded on the client file. The best documents for verifying customer identity are passports, national identity cards, state benefits books, tax coding notifications and driving licences.

Records of measures taken to confirm a customer’s identity must be retained for a period of five years from the completion of the transaction.

Financial Sanctions

HM Treasury (HMT) maintains the UK Consolidated Financial Sanctions List (HMT list). An additional identity check must be made for all customers to ensure they do not appear on this list, which comprises individuals who have had their assets frozen under anti-terror legislation or for other reasons. The list can be viewed on the HMT website. Should you encounter a customer from this list, you should not conduct any further business with that client.

It is suggested that checks of clients against the HMT list could be incorporated into your Verification of Identity form. You may also feel that the MLRO is the best person for people to report to should they find themselves dealing with a customer who is on the list.

A breach of a financial sanctions order may be a criminal offence.

What penalties can be imposed?

Failing to meet anti-money laundering obligations can result in severe penalties:

  • An unlimited fine or a prison sentence of up to 2 years for not maintaining adequate records of transactions.
  • An unlimited fine or a prison sentence of up to 5 years for ‘tipping off’ a potential offender that his activities have been identified as suspicious.
  • An unlimited fine or a prison sentence of up to 5 years for failing to report suspicions of money laundering activity.
  • An unlimited fine or a prison sentence of up to 14 years for direct participation in money laundering activity.

The FCA, and its predecessor the Financial Services Authority, have fined firms in the past for failing to have adequate systems & controls in the area of money laundering prevention. These fines have often been imposed even where there is no actual evidence of suspicious transactions having taken place.

Script 9 – Insurance Sales Process

In this film, we will examine the step-by-step procedure to be followed when dealing with a client’s insurance needs. Firms need to comply with their regulatory obligations at every stage of the process.

Initial disclosure

Firms need to issue a Client Agreement, Terms of Business letter or similar, which sets out to the client at the start of the business relationship the terms on which the firm will do business with them.

Such a document should include:

  • The name of the firm
  • That the firm is regulated by the Financial Conduct Authority (FCA), and that this can be checked on the Financial Services Register. Give your firm’s registration number, the web address of the Register and the consumer contact phone number of the FCA
  • Whether your dealings with the client will be on an advised or non-advised basis
  • Whether your firm can offer products from all insurers in the marketplace, a selected panel of providers or just one insurer
  • Whether you will be remunerated via fees and/or commission for the services you will provide. If the client is allowed to choose their preferred remuneration method, their choice must be clear on the form, say by completing a tick box. If fees are to be charged, a clear explanation needs to be given of how the fee will be calculated
  • Any details of a direct or indirect ownership stake of 10% or above that your firm has in any insurance provider
  • An address and telephone number for making a complaint about your firm, plus details of their right to refer complaints to the Financial Ombudsman Service
  • Details of the compensation arrangements that apply from the Financial Services Compensation Scheme

There is no obligation to use an Initial Disclosure Document (IDD), but if you choose to do so, the format must follow that of the template document on the FCA website.

The firm’s representative should also give the client their business card at the initial disclosure stage.

If you meet the client face-to-face, it would be expected that these documents would be handed over at the start of the first meeting. If you deal remotely with your client, they should be provided via post, email, internet download etc. in good time before the conclusion of any insurance contract.

Unless you use an IDD, the client should be asked to sign the Client Agreement document or equivalent to confirm that they agree to its terms.

Verification of identity

In order to comply with money laundering obligations, it is vital that the identity of all clients is satisfactorily verified at an early stage in the process. Not only should a suitable identity document be inspected (passport, driving licence etc) and details of this check recorded, but all clients should be checked against the HM Treasury Financial Sanctions List, which is a list of those persons whose assets have been frozen under anti-terror legislation or for any other reason.

Fact finding

If your firm is providing advice, then it must gather comprehensive information about the client’s circumstances. The document used here is often referred to as a ‘fact-find’. Required information includes:

  • Date of birth
  • Occupation
  • Income
  • Expenditure
  • How much insurance is required in various areas, e.g. on death, in the event of ill health, to protect the home etc.
  • Existing insurance policies

Research

Unless your firm is either not providing advice, or only has access to a single insurance provider, you will need to research available insurance products in the marketplace and use this research to identify the best policy or policies for your client.

Recommendation

If you are giving advice, and you have selected what you believe to be the best product or products, then you need to present this recommendation to the client. You must only recommend a product which is suitable for the client’s requirements and circumstances, and which you believe they can afford.

The recommended product may not always be the cheapest available. Product features can differ considerably between what on the face of it appear to be similar contracts. Perhaps the best example is critical illness insurance, where the number of illnesses covered can vary considerably, as can the definition the insurer uses of an illness such as cancer.

If a client would be ineligible to claim on certain parts of a policy, then you must make them aware of these restrictions, although these exclusions may well affect your decision as to whether to recommend the plan. This is especially important for sales of payment protection insurance, but you should ensure that this is considered when recommending any insurance contract.

Information provision for non-advised sales

If your firm does not give advice, then clients need to make their own decision as to whether any insurance product you can offer is suitable for them.

You must take care to give equal priority to explaining both the benefits and the disadvantages of any policy. If you give undue prominence to the policy benefits then you are deemed to be giving advice. Similarly, it is classed as advice if you try and encourage the client in any way to purchase a policy.

You still need to take reasonable steps to ensure that a client only buys a policy under which they are eligible to claim benefits. If you become aware that only parts of the cover apply, you should inform the client.

As it can be all too easy to stray into giving advice without intending to, many firms have decided it is safer to adopt an advised sales process.

Key features

Whether you are giving advice or not, you need to provide the client with both a personalised illustration (sometimes known as a key features illustration or KFI) and a policy document. You should go through the main information contained on these and ensure that the client is happy with them.

Typical information from the personalised illustration you should cover includes:

  • The person or persons insured
  • The sum insured or benefit level
  • The term of the policy
  • The premiums payable – both the monthly/annual premium and the total amount payable over the term. Explain whether these are fixed, or whether they can increase over the term
  • Your firm’s level of remuneration for effecting the sale

Typical information from the Policy Document you should cover includes:

  • Exclusions applying to the plan
  • Renewal terms – does the plan run for a fixed term, or does it need to be renewed at set intervals, say annually?
  • How a claim will be assessed
  • Cancellation rights – this is usually 14 days for general insurance, and 30 days for protection contracts such as Critical Illness, Payment Protection Insurance and Term Assurance, starting from the date when the client receives the full policy terms and conditions
  • How to make a claim

After providing this information, the client needs to be given sufficient time to decide whether they wish to proceed with the proposed contract.

Application

Next, the client needs to complete the application form for the relevant product, and in many cases your firm may help them with this. A key point to stress at this stage is that they must disclose all relevant information, and that if they fail to do so, a claim may not be paid or the policy may be invalidated.

Statement of Demands and Needs

At the end of the sales process, you need to write a letter to your client summarising the process. These letters are sometimes known as Suitability Reports or Reason Why Letters, but Statement of Demands and Needs (SODAN) is the name usually used for insurance contracts.

For an advised sale, the SODAN should cover:

  • What the client wants from the product
  • That the policy has been ‘personally recommended’
  • Details of how many providers have been considered before making this recommendation
  • Why the recommended policy is suitable for the client’s requirements
  • Why a particular insurer has been recommended
  • Why the recommended sum insured or benefit level has been chosen
  • The premiums payable – both the monthly/annual amount and the total payable over the term of the plan
  • Exclusions, excesses, limitations or conditions relating to the contract

Where the client has acted on a personal recommendation, you should keep a record of the SODAN for three years from the date the recommendation was made.

A SODAN is still required for non-advised sales. It must set out what the customer wants from the product, and indicate clearly that the sale is non-advised.

Sales monitoring

All firms should have procedures in place for monitoring the suitability of the sales made, and the quality of the supporting documentation. To do this, you need to keep records of all communications with customers, such as a fact-find document for a face-to-face sale. If the sale has been conducted via telephone, it is highly desirable to record the conversations.

File reviews should be carried out on a sample of client files. The proportion reviewed for each staff member should reflect both their competence and the risk of the product concerned. For new staff, or those who are still to demonstrate sufficient levels of competence, it may be desirable to review all of their sales.

These checks might be made by a sales supervisor, or by a compliance officer. If the firm does not have sufficient resources and/or expertise to carry out such checks, it is recommended that this is outsourced to an external consultant.

Where a file review identifies deficiencies, the firm should rectify these, perhaps by issuing revised documentation to the client, or by amending discrepancies in the fact-find.

For face-to-face sales, it can also be beneficial to conduct observed calls, where the supervisor sits in on the client interview and checks that correct procedures are being followed.

Other key issues

Other key things to consider when conducting sales of insurance include:

  • Under no circumstances must a client be told that purchasing insurance is compulsory when this is not the case. They must not also be led to believe that taking out insurance will improve their chances of being approved for another product. This was a major issue with many sales of payment protection insurance (PPI), where clients were often led to believe either that the PPI was compulsory, or that it would improve their chances of being approved for the credit product.

  • PPI must not be sold at the point of sale of the credit product, and must not be sold less than seven days after the credit sale, or seven days after the supply of a personal PPI quote if later. Single premium PPI policies must not be sold.

Conclusion

The FCA sets out rules as to what firms must do at every stage of the insurance sales process. Firms must ensure that they comply with these rules, and that the interests of the client are considered at every stage.

Script 10 – Mortgage Sales Process

In this film, we look at the steps to be followed when advising on or arranging a mortgage as a broker. Many of the mortgage rules changed as of April 26 2014, when the Financial Conduct Authority (FCA)’s Mortgage Market Review (MMR) came into operation.

Initial Disclosure

Firms need to issue a Client Agreement, Terms of Business letter or similar, which sets out to the client at the start of the business relationship the terms on which the firm will do business with them.

Such a document should include:

  • The name of the firm
  • That the firm is regulated by the Financial Conduct Authority (FCA), and that this can be checked on the Financial Services Register. Give your firm’s registration number, the web address of the Register and the consumer contact phone number of the FCA
  • Whether your dealings with the client will be on an advised or non-advised basis
  • Whether your firm can offer products from all lenders in the marketplace, a selected panel of providers or just one lender
  • Whether you will be remunerated via fees and/or commission for the services you will provide. If the client is allowed to choose their preferred remuneration method, their choice must be clear on the form, say by completing a tick box. If fees are to be charged, a clear explanation needs to be given of how the fee will be calculated
  • Any details of a direct or indirect ownership stake that your firm has in any mortgage provider, or any funding your firm receives from a mortgage provider
  • An address and telephone number for making a complaint about your firm, plus details of their right to refer complaints to the Financial Ombudsman Service
  • Details of the compensation arrangements that apply from the Financial Services Compensation Scheme

There is no obligation to use an Initial Disclosure Document (IDD), but if you choose to do so, the format must follow that of the template document on the FCA website.

The option to pay by fee must always be offered if you hold yourself out to be an independent mortgage adviser who can recommend products from all providers. If you are remunerated via fees only, then any commission (often known as a procuration fee for mortgage contracts) must be paid to the client.

Non-advised sales can only be offered where the client is a mortgage professional, or where there will be no face-to-face contact between your firm and the client at any stage of the process.

The firm’s representative should also give the client their business card at the initial disclosure stage.

If you meet the client face-to-face, it would be expected that these documents would be handed over at the start of the first meeting. If you deal remotely with your client, they should be provided via post, email, internet download etc. in good time before the conclusion of any insurance contract.

Unless you use an IDD, the client should be asked to sign the Client Agreement document or equivalent to confirm that they agree to its terms.

Verification of identity

In order to comply with money laundering obligations, it is vital that the identity of all clients is satisfactorily verified at an early stage in the process. Not only should a suitable identity document be inspected (passport, driving licence etc) and details of this check recorded, but all clients should be checked against the HM Treasury Financial Sanctions List, which is a list of those persons whose assets have been frozen under anti-terror legislation or for any other reason.

Fact finding

If your firm is providing advice, then it must gather comprehensive information about the client’s circumstances. The document used here is often referred to as a ‘fact-find’. Required information includes:

  • Date of birth
  • Occupation
  • Income
  • Expenditure
  • Assets and liabilities, including details of existing debts and how much is available as a deposit
  • Existing mortgage arrangements, including details of any penalties for redeeming these
  • Details of the property to be mortgaged
  • Needs and priorities for their future mortgage arrangements – amount required, wishes for interest only or repayment mortgage, preferences regarding type of interest rate, wishes for special features such as offsetting, payment flexibility
  • Credit history – details of any previous defaults, County Court Judgements, formal debt management arrangements, bankruptcy

Income and expenditure

The official position under MMR is that lenders are fully responsible for assessing whether the client can afford the loan. These changes have attracted a great deal of publicity, with details emerging of exactly how stringent some of the expenditure analyses lenders will carry out actually are.

However, a responsible mortgage broker still has a duty to ensure that the mortgage applied for is likely to be affordable, and this means that in practice, you should question the client about their outgoings to get an idea of whether a mortgage application would be deemed affordable by any lenders.

You should also discuss with the client how the income and expenditure position would change in the event of illness, incapacity, redundancy etc. You will also need to consider when certain income and expenditure is likely to stop. For example, a mortgage that will still be payable after a client has retired will affect the amount of income needed in retirement.

When submitting mortgage cases, proof of income will be required in all case via payslips, certified accounts, tax returns etc. You should highlight to your clients, especially those who are self-employed, that they will need to prove their income, and that a previous type of mortgage known as a self-certification mortgage is no longer available.

Interest only mortgages

The position regarding these types of mortgages has also changed considerably with the advent of MMR. It is no longer permitted to take out an interest only mortgage on the basis that the property will be sold to pay off the balance, or on the basis that the loan will be converted to repayment at a later date. Instead an interest only mortgage can only be taken out where there is a credible arrangement in place for accumulating the capital necessary to pay off the mortgage at the end of the term, such as an endowment, a pension plan or another form of savings plan. You are not able to advise on the suitability (or otherwise) of a repayment vehicle unless you are an authorised investment adviser.

Research

Unless your firm is either not providing advice, or only has access to a single mortgage provider, you will need to research available mortgage products in the marketplace and use this research to identify the best deal for your client, considering their needs and circumstances as identified at the fact-finding stage.

Recommendation

If you are giving advice, and you have selected what you believe to be the best product or products, then you need to present this recommendation to the client. You must only recommend a product which is suitable for the client’s requirements and circumstances, and which you believe they can afford.

In many cases, you may be recommending a re-mortgage, whereby the client takes out a new mortgage to pay off the old one. In these circumstances, don’t forget to consider:

  • Are there any early redemption charges on the existing mortgage? Are there good reasons for incurring these, such as cost savings on the new deal?
  • Is it appropriate to consolidate other debts within the new mortgage?

Key features

Whether you are giving advice or not, you need to provide the client with a key features illustration (KFI). You should go through the main information contained on this and ensure that the client is happy.

Typical information from the KFI you should cover includes:

  • The amount of the mortgage
  • The term of the mortgage
  • The interest rates and repayments that apply initially, and those that are expected to apply at the end of any fixed or discounted period
  • The impact of a 1% increase in interest rates on the payments
  • The Annual Percentage Rate
  • Any compulsory insurance
  • Early repayment charges
  • Other charges and fees
  • Your firm’s level of remuneration for effecting the sale

After providing this information, the client needs to be given sufficient time to decide whether they wish to proceed with the proposed contract.

Application

Next, the client needs to complete the application form for the relevant product, and in many cases your firm may help them with this. A key point to stress at this stage is that to give any false information is classed as fraud.

Before completing the application, you should make a final check that there have been no changes in client circumstances since the fact find meeting. Any changes may necessitate you re-assessing the suitability of your recommendation and/or providing a revised KFI.

Suitability report

For an advised sale, your Suitability Report should be a clear statement of why and how your recommendations meet the client’s needs.

The report should include:

  • The client’s circumstances, objectives and priorities.
  • That the policy has been ‘personally recommended’
  • Details of how many providers have been considered before making this recommendation
  • Why the recommended plan is suitable for the client’s requirements
  • Why a particular lender has been recommended
  • Key information from the KFI, such as rates and payments, fees and charges
  • Why other possible solutions were discounted ,e.g. further advance or secured loan
  • Where interest only has been recommended, why this is more appropriate than repayment, details of what the repayments would be on a repayment mortgage and details of the repayment arrangements to be used
  • The standard risk warning – ‘your home may be at risk if you do not keep up repayments on a mortgage or other loan secured on it’

A Suitability Report is still required for non-advised sales. It must set out what the customer wants from the product, and indicate clearly that the sale is non-advised.

Sales monitoring

All firms should have procedures in place for monitoring the suitability of the sales made, and the quality of the supporting documentation. To do this, you need to keep records of all communications with customers, such as a fact-find document for a face-to-face sale. If the sale has been conducted via telephone, it is highly desirable to record the conversations.

File reviews should be carried out on a sample of client files. The proportion reviewed for each staff member should reflect both their competence and the risk of the product concerned. For new staff, or those who are still to demonstrate sufficient levels of competence, it may be desirable to review all of their sales.

These checks might be made by a sales supervisor, or by a compliance officer. If the firm does not have sufficient resources and/or expertise to carry out such checks, it is recommended that this is outsourced to an external consultant.

Where a file review identifies deficiencies, the firm should rectify these, perhaps by issuing revised documentation to the client, or by amending discrepancies in the fact-find.

For face-to-face sales, it can also be beneficial to conduct observed calls, where the supervisor sits in on the client interview and checks that correct procedures are being followed.

Associated insurance

It is very much part of a mortgage adviser’s job to ensure that the client is advised to effect suitable insurance. If you cannot arrange this yourself, you should give a generic recommendation for the client to buy this elsewhere. All mortgage lenders will insist that the property is covered by a suitable buildings insurance plan, whilst other insurance that may be required includes:

  • Contents insurance
  • Life and critical illness insurance for the mortgage balance
  • Payment protection insurance to allow payments to be maintained in the event of accident, sickness and unemployment

Conclusion

The FCA sets out rules as to what firms must do at every stage of the mortgage sales process. Firms must ensure that they comply with these rules, and that the interests of the client are considered at every stage.

Script 11 – Debt counselling/adjusting

What are debt counselling, debt adjusting and debt management?

A debt counsellor gives advice to borrowers who are struggling to pay back their debts. A debt adjuster manages borrowers’ debts on their behalf. The general term which encompasses both of these activities is debt management.

Regulation of debt management

Since April 1 2014, the Financial Conduct Authority (FCA) has regulated consumer credit activities in the UK, which includes debt management firms and not-for-profit bodies active in this area.

In the FCA regime debt counselling and adjusting are high-risk activities.

Firms giving advice on debt management should take into consideration the FCA’s high-level Principles for Businesses – a series of principles which firms are expected to abide by at all times – and the Threshold Conditions – a series of basic requirements which all firms wishing to be authorised must satisfy. The detailed rules for consumer credit firms are to be found in the new Consumer Credit Sourcebook, known as CONC.

Many of the FCA rules relating to debt management are based around the guidance of the former regulator, the Office of Fair Trading (OFT). However, under the new rules, debt managers are subject to new requirements regarding the handling of client money, new prudential requirements and a new obligation to direct customers to sources of free advice in certain circumstances.

The FCA has more resources than the OFT to supervise firms, and can act on a wider range of issues. Some FCA rules are legally binding rather than merely being guidance, so firms will be expected to comply effectively. Firms who fail to comply with their regulatory obligations can be warned, fined or have their authorisation withdrawn.

Most debt managers are currently authorised by the FCA under its interim permission regime. However, all such firms will need to apply to upgrade their interim permission to either full authorisation, in the case of commercial firms, or to limited permission, in the case of not-for-profit bodies. Depending on a firm’s postcode area, the three-month period in which this application to upgrade must be made will commence between October 1 2014 and January 1 2015 in the case of commercial debt adjusters, and between February 1 2015 and May 1 2015 in the case of commercial debt managers.

Key FCA principles

In the rest of this video, we will look at the FCA rules relating to debt management.

Firstly, firms should note that while all of the FCA’s high-level principles are important, some are particularly important to debt managers.

Principle 2 says that a firm must conduct its business with due skill, care and diligence. This applies to firms who need to ensure that they consider the different laws and approaches to debt that apply in different parts of the UK. For example, Scots law applies in Scotland, not the law of England and Wales, and arrangements such as a Trust Deed or a Low Income, Low Asset (LILA) are only available in Scotland.

Any firm which recommends a debt solution which it knows, or suspects, is unaffordable is likely to contravene Principle 2, as well as Principle 6 – A firm must pay due regard to the interests of its customers and treat them fairly – and Principle 9 – A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement.

Discouraging a customer from seeking other sources of debt assistance is also likely to contravene Principle 6.

Vulnerable customers

Firms need to have documented procedures for the treatment of vulnerable customers, and ensure that these procedures are followed when applicable. They must also be able to identify vulnerable customers, which might include those with mental capacity issues, those with limited financial knowledge, the elderly or the disabled.

Pre-contract disclosure

The information to be provided to a customer when they first enquire about a firm’s services includes:

  • The type of services to be offered by the firm

  • The duration of the proposed contract

  • The cost of the firm’s services, or where this is not possible an estimate of the total cost, or details of how this will be calculated

  • All fees and charges payable, and how these are calculated

  • What services are provided in exchange for the fee

  • The circumstances in which the proposed contract may be terminated

  • The effect entering into the contract would have on the customer’s credit rating

Debt advice

Firms must gather comprehensive information on a customer’s financial circumstances. They must then consider all of their needs and circumstances when giving advice, and give advice that is both suitable and in the customer’s best interests.

The firm should gather information on:

  • Their financial position – income, expenditure, existing debts, previous debt solutions used
  • Their level of financial understanding
  • The part of the UK they reside in – as we have already seen different laws apply to different nations of the UK, and these differences can have a significant impact on the activity of giving debt advice

All options which may be suitable for the customer’s needs and circumstances should be considered. These options may include debt management plans, debt relief orders, individual voluntary arrangements or other types of solution. The customer must be provided with comprehensive information about each of these suitable options. The reasons why other options may have been deemed unsuitable also need to be explained to the customer.

Before being asked to sign up to any debt solution, the customer must be given sufficient time to consider the firm’s advice and the associated information provided.

If a firm identifies at a later date that any advice it gave to a customer was unsuitable or inappropriate, then the firm must immediately refund to the customer any fees paid for that advice.

Administration of debt management plans

When administering a debt management plan, a firm must ensure that it does all of the following:

  • Maintains regular contact with the customer

  • Continually reviews the customer’s circumstances, and considers whether changes to the plan – such as reduced payments – might be necessary in light of these new circumstances. If a customer who previously had a good payment record then misses one or more payments then this might be regarded as evidence of a material change in their circumstances.

  • Keeps the customer informed of its dealings with lenders, particularly if the lender raises issues about anything do with the plan. For example, the customer needs to be told if a lender refuses to deal with the firm altogether, refuses to accept a payment or fails to freeze interest and charges on the debt

  • Reviews the plan annually, or more regularly if there is evidence of a change in the customer’s financial circumstances. This review may lead the firm to believe that it is in the customer’s interests to either amend or terminate the plan. The customer must be informed immediately of the outcome of any review carried out.

  • Provides the customer with a statement at the start of their plan, and at least annually thereafter. Statements should also be provided when the customer requests them, provided that the customer does not make an unreasonable number of requests of this type.

  • Maintains adequate records regarding each plan, and continues to do so until the plan reaches the end of the term or is terminated

  • Checks the accuracy of details provided regarding the customer’s accounts

  • Checks the accuracy of any information which is sent to lenders

Communications with lenders

Much of what a debt manager does is likely to involve liaising with lenders on behalf of customers.

When a firm needs to communicate with a lender, or the lender’s representative, on a customer’s behalf, the firm must ensure that these communications are conducted in a transparent manner, and that the interests of the customer are considered when making these communications.

Entering into a debt management plan often means that reduced payments are made and/or payments are suspended for a period. If either of these apply, the firm administering the debt solution must inform the relevant lenders of the situation as soon as possible. Details should be given to the lenders of the reason payments will not be made in full, and of the period of time for which this will be the case.

Fees and charges

Like any firm, a commercial debt management organisation needs to make a profit, and their principal source of revenue will inevitably be the fees and charges received from their customers. However, the CONC sourcebook sets out strict rules regarding fees and charges.

The overriding principle should be that a firm’s fees and charges should not be so large that they prevent a customer from making repayments under the agreed debt solution. Firms should also have regard to the timing of fees and charges payments, and ensure that, as far as possible, these fees and charges are taken at times best suited to the customer.

If in any given month, a customer is paying more to their debt management firm in fees and charges than they pay in debt repayments, then this is likely to be regarded as an example of a situation where the fee payments are likely to affect their ability to make repayments.

Once any fees and charges related to setting up a debt management plan have been paid, or six months into the plan, if earlier, it is normally expected that the percentage of the repayments that the firm takes in fees is reduced.

Fees and charges for administration of the plan should normally be spread evenly over the term of the plan.

The percentage of the repayments the firm takes for its fees and charges should generally be lower for higher total repayment amounts.

Regarding fees and charges, it is considered unfair for a firm to do any of the following:

  • Switch a customer to a different debt solution and impose set-up or administration charges that duplicate charges already levied on the old plan

  • Switch a customer to a different debt solution without their consent and without informing them of the reason for the switch

  • Take payments from the customer before a contract has commenced

  • Request payments from a customer’s payment account, unless the customer has specifically consented to the firm doing this

  • Accept payment for fees and charges on a credit card, or via any other form of credit

  • Impose cancellation fees and charges which exceed the costs incurred by the firm as a result of the cancellation

  • Impose fees or charges which are outside the terms of the agreement with a customer

  • Impose additional advice fees where the original advice was unsuitable or inappropriate

Directing customers to free debt advice

As we saw earlier, it is likely to be considered a contravention of Principle 6 if a commercial debt manager discourages a customer from seeking free debt advice.

In its first communication with a customer, a firm must make them aware that free debt counselling, debt adjusting and credit information services are available. This obligation applies regardless of whether this first communication involves oral or written interaction. All of the information required regarding this must be displayed prominently, or communicated prominently if it is an oral communication.

The firm’s website must state that further information on these topics is available from the Money Advice Service (MAS). A link to the specific MAS page that deals with debt advice must be given, not just to the MAS homepage.

A commercial debt manager must not in any way state or imply that they provide free debt advice, or that they are a not-for-profit organisation, government body, charity or helpline, when this is not the case. This includes using a trading name which might suggest this, or designing the firm’s website in such a way that a customer might think they are dealing with a not-for-profit body.

Prudential requirements

Debt management firms are subject to new requirements regarding the level of financial resources they need to maintain. This is known as the ‘prudential resources requirement’. The level of prudential resources a firm must hold will depend on their level of debts under management, and the CONC sourcebook gives full details of the formula to be used to calculate this resources requirement. Prudential resources include a firm’s share capital, reserves, retained net profits and, subject to certain conditions, subordinated loans and debt.

These requirements do not apply for firms that hold interim permission, and the rules regarding this will not be fully implemented until April 1 2017.

Handling of client money

Commercial debt managers who hold client money need to observe rules which include the need to:

  • Keep client money separate from the main company account

  • Maintain clear records of client money receipts

  • Pay interest on the money

  • Pay creditors promptly

  • Conduct regular internal reconciliations

  • Undergo an independent annual audit

The requirements for handling client money will not take effect until the firm holds full authorisation, and will thus not apply during any interim permission period.

Conclusion

Debt management is regarded as a high-risk area by the FCA, and firms operating in this area can expect to come under close scrutiny. It is extremely important therefore that firms understand their regulatory obligations.

Script 12 – Debt collecting

Regulation of debt collecting

Like almost all activities connected to consumer credit, debt collectors are now subject to regulation by the Financial Conduct Authority (FCA).

But what does this mean for those engaging in this activity?

Let’s start by looking at what debt collection is.

Regulated debt collection is where debt due to a consumer credit firm is collected by them or by another body who is acting on their behalf. Whether the lender collects the debt themselves, or engages another party to do this on their behalf, the debt collection activity is still subject to regulation by the FCA.

Consumer credit firms are categorised as either higher risk or lower risk. Debt collection in the FCA regime is a high risk activity. This means that firms that are active in this area can expect to be closely supervised by the FCA.

The FCA has more resources to supervise firms than the previous regulator, the Office of Fair Trading (OFT). Although the rules that debt collectors have to abide by are largely based around previous OFT guidance, many FCA rules have a legal status, rather than simply being guidance, so firms will be expected to comply effectively.

Most debt collection firms are currently authorised by the FCA under its interim permission regime. However, all firms who currently hold interim permission will need to apply to the FCA to upgrade to full permission. Depending on their postcode, debt collection firms need to make their full permission application between March 1 2015 and May 31 2015, or between April 1 2015 and June 30 2015. Any firm which fails to apply within this three-month period will lose their authorisation.

In the rest of this video, we will examine some of the key FCA rules relating to debt collection.

Arrears

A useful starting point is to clarify the definition the FCA uses as to when a customer is in arrears. Essentially, a customer is in arrears if they have failed to make one or more payments as required by the terms of a credit agreement they have entered into.

Vulnerable customers

Firms should have documented procedures for dealing with customers in arrears. These procedures should include specific arrangements for dealing with customers in arrears who might meet the definition of a ‘vulnerable customer’. The procedures should be written with the FCA’s Principle 6 in mind, which reads: “A firm must pay due regard to the interests of its customers and treat them fairly.”

Firms should note that a customer with mental capacity issues or mental health problems is likely to meet the definition of a vulnerable customer. An elderly customer or one with a very low income might also fall into this category. Firms must ensure that vulnerable customers are treated with particular care, and are recommended to make use of the Money Advice Liaison Group ‘s guidance document entitled “Good Practice Awareness Guidelines for Consumers with Mental Health Problems and Debt”.

Definition of a customer

For the purposes of its rules on debt collection, firms should note that the FCA uses a different definition of a customer to that used elsewhere in its Handbook. Firms should obviously take every effort to ensure that they pursue the correct person when seeking to recover a debt.

Here, a ‘customer’ means any person from whom payment of a debt is sought. This includes anyone from whom a firm erroneously seeks to recover a debt in the incorrect belief that they are the borrower. It also refers to a person who provides a guarantee or an indemnity on a credit agreement, or anyone to whom rights and obligations under a credit agreement are assigned.

The principle of negotiation

There may come a point in any debt collection attempt where it becomes necessary to take formal measures to recover the debt, such as taking court action or re-possessing the security associated with the loan. But this must always be a last resort, and the first step when seeking to recover amounts due should always be to negotiate with the customer and try and find a mutually convenient alternative repayment plan. If they have engaged the services of a debt counsellor, then negotiations should take place with the counsellor, who is then considered to be the customer’s representative.

Debt management arrangements

If a firm is informed that a customer, or a debt counsellor, or anyone else acting on a customer’s behalf is attempting to formulate a repayment plan for the customer, then attempts to recover the debt must be suspended for at least 30 days, and then for a further 30 days if genuine progress is being made regarding setting up the repayment plan.

Unless there is a compelling reason to do otherwise, a firm must co-operate fully with a debt management company or other representative that the customer appoints in seeking to manage their debts. Unless the customer has consented to direct contact being made, then all correspondence should be made via the customer’s representative.

Firms must not attempt to recover debts from any customer who has entered into a debt relief order, an individual voluntary arrangement, a protected trust deed (only applicable in Scotland) or a Debt Arrangement Scheme (again available in Scotland only). The same applies if the customer is subject to bankruptcy.

Making contact regarding debt collection

When firms make contact with borrowers regarding unpaid debts, again there are strict rules as to how they should go about this.

When contacting customers regarding arrears, default or recovery issues, the person making the contact must state:

  • The purpose of the contact – firms must be totally transparent about the fact that they are telephoning, writing to or visiting the customer in order to seek repayment of a debt

  • The company that they work for

  • Their role within the company

Contacts regarding debt collection must not be made at unreasonable hours. Generally speaking, this means refraining from calling very early in the morning or late at night. However, if a firm is aware that a particular customer would find a call during the daytime ‘unsocial’ (such as a night shift worker), then it must refrain from making contact at these times. Conversely, it may be appropriate to make contact with shift workers at times that would be inappropriate for a nine-to-five worker.

Under no circumstances must a customer be asked to contact the firm regarding debt recovery issues on a premium rate phone line.

A firm must not disclose details of a customer’s debt to a third party who has no connection with the loan agreement. Nor should a firm threaten to take this action. For example, firms are not permitted to intimidate borrowers into repaying by threatening to inform family members, employers etc.

Firms cannot take any action which might be ‘publicly embarrassing’ to the customer when attempting to recover a debt, and must take care to ensure third parties do not become aware of their situation. This means that firms cannot make contact at work, or approach the customer in a social situation, or even inform others who live with them of their debt situation.

Persons making visits to a customer’s home with the intention of recovering a debt must not:

  • Act in a threatening manner

  • Enter the property without consent unless they have a court order permitting them to do so

  • Refuse to leave when asked to do so

  • Remain in the property if it is clear that the customer is distressed or lacks the mental capacity to make a decision on the situation

Visits must also not be made when the customer has raised a formal dispute as to whether a debt is owed, and when this dispute is still being resolved.

A firm cannot claim to have powers or status that it does not have when attempting to recover a debt. For example, any suggestion that a firm is acting on behalf of a court, or that they are a law firm or a bailiff, when this is not the case, would be inappropriate.

Debt recovery charges

Debt collection firms will definitely incur costs through trying to recover amounts due. However, any debt recovery charges imposed must be proportionate to the additional costs the debt recovery process causes for the firm.

If a firm is contractually permitted to impose default charges on a customer, then the amount of these charges and the circumstances in which they may be imposed should be stated in the credit agreement.

Continuous payment authority

Continuous payment authority (CPA) is a method by which a firm can collect amounts due directly from a customer’s bank account. So under CPA, once the payment due date has passed, the general principle is that the firm effectively has the right to collect any sums which then appear in the account.

However, the FCA has strict rules on how CPA can be used. A firm can only use CPA in accordance with the terms and conditions set out in the credit agreement. It must also explain to the customer how CPA will operate before the facility is used. A firm can only attempt to recover part of a payment via CPA if the agreement explicitly permits this.

For payday loans and other credit agreements which meet the FCA’s definition of ‘high cost short-term credit’, a firm should not use CPA to recover sums due if two unsuccessful CPA attempts have already been made regarding the same payment.

If a loan is re-financed, then for the purposes of this rule, the re-financed loan shall be treated as an extension of the same loan. So if one unsuccessful CPA attempt is made on the original loan and one on the re-financed loan, then no further CPA attempts can be made.

However, if the firm exercises forbearance – re-finances a loan in such a way that no additional interest is payable, and no charges are payable other than an admin charge – then two additional CPA attempts are permitted from the point that forbearance is used, regardless of whether any unsuccessful attempts to use CPA were made on the original loan.

Firms must never use CPA in such a way that will cause financial hardship to the customer. Firms must think carefully before collecting payments in this way as to whether it is appropriate to do so.

Examples of inappropriate use of CPA would include:

  • Taking payment before the customer’s salary or other significant payment has arrived into the account

  • Taking payment is made when the firm knows, or has reason to believe, that there are insufficient funds in the account to cover the payment

  • Taking payment when there are sufficient funds in the account to cover the payment, but where this would leave insufficient funds to cover the customer’s important debts and essential expenses

  • Continuing to try and use CPA over an extended period without investigating the reasons as to why previous attempts to collect the payment have been unsuccessful

Authority given to debt collectors

If a firm is acting on behalf of a lender in seeking to recover a debt, then it must be aware of the limits of its authority. If customer makes a conciliatory offer to repay a debt in a certain way, then the firm must refer the offer to the lender, unless they have been given the authority by the lender to make decisions as to whether any such offers are acceptable.

Assignment

A debt collection firm may sometimes decide to assign a debt to another party. Firms must inform their customers as soon as possible whenever a debt is assigned to a third party.

Disputes

All debt collection firms will be faced with situations from time to time where a person disputes the debt for which they are being pursued. This dispute may be raised on the grounds that the wrong person is being pursued for the debt, that they are being pursued for an incorrect amount or that the debt itself does not exist.

If a firm knows, or has reason to suspect, that a particular person is not the actual borrower under the agreement, then it must not pursue them for the debt. There have been a number of instances of the wrong person being pursued as a result of fraud or identity theft, or due to poor record keeping on the part of the firm.

If a customer asserts either that they have settled a debt or otherwise disputes the need to make repayments, then the firm must treat their claims seriously.

Firms must therefore investigate any instances where a person claims they do not owe anything to the firm, and be prepared to abandon attempts to recover the debt unless they have evidence to disprove the claims made.

Free debt advice

Customers who have been in arrears for more than a short period of time, or who show real signs of financial difficulty, should be made aware of organisations who can supply free debt advice. Note that this rule requires them to be made aware of sources of ‘free’ advice, so it is not acceptable to refer them to another commercial organisation.

Statute barred debts

Statute barred’ in relation to debts means that the period in which a claim regarding the debt can be made has ended. Under the law of England, Wales and Northern Ireland, this time period is usually six years and under Scottish law it is five years. These time periods are known as the ‘limitation period’.

Although it is theoretically possible to recovery any statute barred debt (in England, Wales or Northern Ireland), a firm can only do this if it has been in regular contact with the customer during the limitation period. Under the law of Scotland, statute barred debts are deemed to no longer exist.

Conclusion

Debt collection is regarded as a high-risk area by the FCA, and firms operating in this area can expect to come under close scrutiny. It is extremely important therefore that firms understand their regulatory obligations. The chapter relating to arrears and debt recovery is the longest in the FCA’s Consumer Credit rulebook.

Script 13 – Lenders

Since 2005, mortgage lenders have been subject to regulation by the Financial Conduct Authority (FCA). From April 1 2014, other forms of lending, including second charge secured loans and payday loans, also came under the FCA’s jurisdiction. Here we look at some of the key FCA requirements that the various types of lenders need to comply with.

All lenders who currently hold interim permission will need to apply to the FCA to upgrade to full authorisation. Each firm has been allocated a three month period during which this application must be made. When this period is depends on the type of lending the firm engages in, and in some cases on their postcode area. Please refer to the FCA website for details of when your application period is.

Rulebooks

Lenders, like all authorised firms, need to comply with the relevant sections of the FCA Handbook. These include:

  • The threshold conditions – a set of basic requirements all firms must meet
  • The Principles for Business – 11 high level requirements which must be met at all times, which include the requirement to treat customers fairly
  • The complaints resolution rules
  • The systems and controls requirements

Treating Customers Fairly is a very important principle for all authorised firms. Firms must always consider what the impact of their actions might be on their customers. They must be totally honest and transparent with their customers at all times, especially regarding the nature of their service, the suitability of their advice and their fees and charges.

The detailed rules that lenders must follow are detailed in the Mortgage Conduct of Business (MCOBS) sourcebook (in the case of regulated mortgages), or in the Consumer Credit (CONC) sourcebook (for other forms of credit).

Mortgage Market Review

For all lenders, the regulatory landscape has changed significantly in recent months. Since April 26 2014, mortgage lenders have been subject to the requirements of the Mortgage Market Review (MMR). The changes introduced via MMR include:

  • A ban on self-certification mortgages

  • More rigorous requirements relating to checking of affordability

  • A ban on non-advised sales in most cases

  • Interest-only mortgages only permitted where the borrower has a credible repayment plan

FCA consumer credit rules

Now that credit firms are subject to FCA regulation, they are in many cases subject to additional rules. This is especially true for payday lenders, who are now subject to new requirements on matters such as affordability assessments, rollovers, use of Continuous Payment Authority and promotional material.

Disclosure

On first contact with a customer, a firm needs to provide the required initial disclosure information. The required information for a regulated mortgage contract includes:

  • Whether the firm can only offer its own products, or whether it can offer loans from a range of lenders, or from all lenders in the marketplace
  • Whether the firm will offer advice to the customer
  • Whether the firm will receive payment for its services via fee or commission
  • Whether the firm is directly authorised by the FCA or is an appointed representative of another firm
  • How to make a complaint about the firm
  • The arrangements regarding the Financial Services Compensation Scheme which will apply to the contract

Mortgage customers must be provided with a key facts illustration (KFI) before they are asked to agree to enter into a contract. The required information on a KFI includes:

  • The amount borrowed
  • The value of the property on which the mortgage is secured
  • The term of the contract
  • The name of the lender
  • Whether the mortgage is capital repayment or interest only
  • Whether advice has been provided by the lender, or by a broker, relating to the contract in question
  • The level and type of interest rate that will apply, and if applicable, details of how long this rate will last for and what rate will apply after that time
  • The repayments associated with these interest rates
  • The total amount repayable over the term
  • The Annual Percentage Rate
  • The amount by which repayments would increase if interest rates rose by 1%
  • The fees the customer needs to pay in connection with the mortgage
  • Details of early repayment charges and higher lending charges – here these exact terms must be used when describing charges of this type
  • The risk warning: ‘Your home may be repossessed if you do not keep up repayments on your mortgage’.

Borrowers taking out consumer credit agreements must be allowed to consider the terms of their agreement before they are asked to make a decision. The required pre-contractual disclosure information includes:

  • The required individual repayments, and where known, the total amount repayable over the term of the agreement
  • Any features of the agreement which make the credit unsuitable for particular uses
  • Any features of the agreement which could adversely affect the customer
  • Consequences of failing to make the required repayments
  • Details of any right a customer has to withdraw from the agreement, together with information on when and how such a right should be exercised

Affordability and suitability

All lenders must observe the principle of responsible lending at all times. Under no circumstances must credit be granted unless the lender has carried out a comprehensive affordability assessment.

This assessment must take into account the customer’s income and expenditure, including essential bills and existing credit commitments. Consideration should be given here not just to current income and expenditure, but also to whether any changes in income and expenditure could reasonably be foreseen, e.g. change of employment, loss of employment, retirement, childbirth etc. Where the interest rate on the loan will be variable, firms must assess not just whether the customer can afford the initial payment, but also whether they are likely to be able to afford the payments if interest rates were to increase.

Another very important duty for lenders is to carry out a comprehensive credit check on each applicant. If the results of this credit check indicate that lending to a customer would pose an undue risk, then the firm needs to consider whether it needs to offer credit on revised terms, or whether it should decline the application altogether.

Having carried out these affordability and credit assessments, the firm then needs to consider whether the proposed credit arrangement is suitable for the customer. If the firm holds itself out as giving advice, then it must not recommend an unsuitable solution, even if it has no suitable product available. If the firm has access to a number of suitable products, then it must recommend the most suitable product.

Customers in difficulty

Firms should have documented procedures for dealing with customers in arrears. These procedures should include specific arrangements for dealing with customers in arrears who might meet the definition of a ‘vulnerable customer’. The procedures should be written with the need to treat customers fairly in mind.

A customer with mental capacity issues or mental health problems is likely to meet the definition of a vulnerable customer. An elderly customer or one with a very low income might also fall into this category.

When any customer falls behind with their repayments, a lender’s first strategy should be to co-operate with the borrower, and try and reach a mutually agreeable solution. A firm may for example carry out one or more of the following steps:

  • Freezing interest
  • Deferring payments
  • Accepting reduced payments
  • Extending the repayment term

If the customer engages a debt counsellor or other person to act on their behalf, then the lender must co-operate with this third party to try and reach an amicable solution.

When seeking to collect a debt, firms must again treat their customers with respect. They cannot use threats or intimidation, make contact at unsocial hours, make contact at the customer’s place of work or enter a customer’s property without consent. Firms must also ensure that they do not disclose the customer’s debt situation to other parties, such as people they live with or their employers.

Charges for debt collection attempts and arrears situations must be reasonable and proportionate, and reflect the actual costs incurred by the firm as a result of the situation.

Re-possession, court proceedings and other legal remedies should only be used as a last resort when all other options to recover the debt have been exhausted.

Firms should also take extreme care to ensure that they pursue the correct person when seeking repayment of a debt. Any disputes regarding their efforts to collect a debt, such as a claim that the wrong person is being targeted, must be fully and fairly investigated.

Financial promotions

Which set of financial promotions rules applies to which firms is rather complex. It is not simply the case that the rules in MCOBS apply to first charge mortgages and those in CONC to other forms of lending.

This is because the FCA has a concept known as ‘qualifying credit’, and all credit of this type is subject to the MCOBS rules. Qualifying credit is any secured loan offered by a firm which arranges regulated mortgage contracts. So essentially, any communications for second charge secured loans issued by firms who also sell residential first charge mortgages will be covered by the MCOBS rules and not those in CONC.

However, a credit firm that arranges second charge secured loans but not residential first charge mortgages will be subject to the CONC communications rules. And a firm that arranges first charge mortgages and offers a wide range of other credit products will be subject to the MCOBS rules for their secured lending and the CONC rules for their unsecured lending.

The FCA’s promotions rules prohibit cold calling for regulated mortgage contracts.

Key concepts relating to credit promotions include:

  • Many promotions require the Annual Percentage Rate to be disclosed, particularly where the promotion contains other price information, suggests that credit might be available to those who have had difficulty accessing credit, or provides any incentive to take out the credit product
  • In many cases, risk warnings need to be included on the promotion. Examples include:
  • For a regulated mortgage: ‘Your home may be repossessed if you do not keep up repayments on your mortgage’
  • For a secured loan used to consolidate other debts: “THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME”
  • For a payday loan: ‘Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk’
  • Promotions must observe the FCA’s ‘clear, fair and not misleading’ principle. Important information must not be concealed in small print.
  • Promotions must be communicated in plain English. These types of communication must be easily understood by an average member of the group it is aimed at.

FCA reporting

Regulated mortgage lenders must submit a data return known as the Mortgage Lending And Administration Return (MLAR) to the FCA on a quarterly basis. Required date includes general financial information about the firm, as well as details of the mortgages granted within the reporting period.

Mortgage fraud

The Information From Lenders (IFL) scheme allows lenders to let the FCA know of other firms, such as intermediaries, that they think might be involved with mortgage fraud.

The FCA does, however, expect all lenders to take responsibility for protecting their business against fraud, by having appropriate systems and controls, making fraud prevention a key part of the business and ensuring senior managers take responsibility for the protection of fraud risks.

Mortgage Credit Directive

For first and second charge mortgage lenders, the regulatory landscape is set to change further from March 2016, when the UK will be obliged to implement the terms of the European Union’s Mortgage Credit Directive. The Directive will set new requirements on firms regarding forbearance – measures for dealing with customers in arrears – and will replace the existing KFI with a European Standardised Information Sheet. Firms will also be subject to new rules regarding staff competence and creditworthiness assessments.

Conclusion

The regulatory requirements for lenders are wide-ranging, and the FCA has a range of enforcement penalties available to it. It is extremely important therefore that firms understand their regulatory obligations.

Script 14 – Broking

Since 2005, mortgage brokers have been subject to regulation by the Financial Conduct Authority (FCA). From April 1 2014, other forms of consumer credit, including second charge secured loans and payday loans, also came under the FCA’s jurisdiction. This means that brokers transacting any form of consumer credit business need to be authorised by the FCA.

Here we look at some of the key FCA requirements that brokers need to comply with.

All brokers who currently hold interim permission will need to apply to the FCA to upgrade to full authorisation. Each firm has been allocated a three month period during which this application must be made. When this period is depends on the type of business the firm engages in, and in some cases on their postcode area. Please refer to the FCA website for details of when your application period is.

A handful of credit brokers will only need to seek limited permission, rather than full authorisation. The application requirements for limited permission are less onerous. This applies where credit brokerage is a secondary activity for an organisation whose core business is not financial services.

Rulebooks

Brokers, like all authorised firms, need to comply with the relevant sections of the FCA Handbook. These include:

  • The threshold conditions – a set of basic requirements all firms must meet, relating to corporate structure, financial solvency, fitness & propriety and more
  • The Principles for Business – 11 high level requirements which must be met at all times, which include the requirement to treat customers fairly
  • The complaints resolution rules
  • The systems and controls requirements

Treating Customers Fairly is a very important principle for all authorised firms. Firms must always consider what the impact of their actions might be on their customers. They must be totally honest and transparent with their customers at all times, especially regarding the nature of their service, the suitability of their advice and their fees and charges.

The detailed rules that brokers must follow are detailed in the Mortgage Conduct of Business (MCOBS) sourcebook (in the case of regulated mortgages), or in the Consumer Credit (CONC) sourcebook (for other forms of credit).

Mortgage Market Review

The regulatory landscape for residential mortgages has changed significantly in recent months. On April 26 2014, the FCA introduced the Mortgage Market Review (MMR). The changes introduced via MMR include:

  • A ban on self-certification mortgages

  • More rigorous requirements relating to checking of affordability

  • A ban on non-advised sales in most cases

  • Interest-only mortgages only permitted where the borrower has a credible repayment plan

Although in theory, it is the lender’s responsibility to carry out the affordability check, a responsible mortgage broker will still carry out an assessment of whether their customers are likely to be able to afford the repayments of the proposed mortgage contract. A broker will not want to recommend a lender to their customers, only to see that lender decline to give them a mortgage on the grounds of affordability.

We will look at the issue of affordability assessments in more detail later.

FCA consumer credit rules

Now that credit firms are subject to FCA regulation, they are in some cases subject to additional rules. This is especially true for payday loans, and brokers who offer these types of loans need to be aware of the new requirements, particularly with regard to promotional material.

The FCA uses a wider definition of credit brokerage than that used by the previous credit regulator, the Office of Fair Trading (OFT). Under the FCA, all intermediation activities with a view to arranging credit are classed as ‘credit brokerage’ and thus require authorisation.

The FCA has more resources to supervise firms than the OFT did, and can impose a wider range of enforcement penalties for wrongdoing.

Disclosure

On first contact with a customer, a firm needs to provide the required initial disclosure information. The required information for a regulated mortgage contract includes:

  • Whether the firm can only offer its own products, or whether it can offer loans from a range of lenders, or from all lenders in the marketplace. A broker wishing to describe themselves as ‘independent’ must be willing to consider a range of lenders that is large enough to represent a fair representation of the market.
  • Whether the firm will offer advice to the customer
  • Whether the firm will receive payment for its services via fee or commission
  • Whether the firm is directly authorised by the FCA or is an appointed representative of another firm
  • How to make a complaint about the firm
  • The arrangements regarding the Financial Services Compensation Scheme which will apply to the contract

Mortgage customers must be provided with a key facts illustration (KFI) before they are asked to agree to enter into a contract. As the broker arranging the mortgage, you will be required to supply this information on behalf of the lender. The required information on a KFI includes:

  • The amount borrowed
  • The value of the property on which the mortgage is secured
  • The term of the contract
  • The name of the lender
  • Whether the mortgage is capital repayment or interest only
  • Whether advice has been provided by the lender, or by a broker, relating to the contract in question
  • The level and type of interest rate that will apply, and if applicable, details of how long this rate will last for and what rate will apply after that time
  • The repayments associated with these interest rates
  • The total amount repayable over the term
  • The Annual Percentage Rate
  • The amount by which repayments would increase if interest rates rose by 1%
  • The fees the customer needs to pay in connection with the mortgage
  • Details of early repayment charges and higher lending charges – here these exact terms must be used when describing charges of this type
  • The risk warning: ‘Your home may be repossessed if you do not keep up repayments on your mortgage’.

Borrowers taking out consumer credit agreements must be allowed to consider the terms of their agreement before they are asked to make a decision. The required pre-contractual disclosure information includes:

  • The required individual repayments, and where known, the total amount repayable over the term of the agreement
  • Any features of the agreement which make the credit unsuitable for particular uses
  • Any features of the agreement which could adversely affect the customer
  • Consequences of failing to make the required repayments
  • Details of any right a customer has to withdraw from the agreement, together with information on when and how such a right should be exercised

Affordability and suitability

An affordability assessment must take into account the customer’s income and expenditure, including essential bills and existing credit commitments. Consideration should be given here not just to current income and expenditure, but also to whether any changes in income and expenditure could reasonably be foreseen, e.g. change of employment, loss of employment, retirement, childbirth etc. Where the interest rate on the loan will be variable, firms must assess not just whether the customer can afford the initial payment, but also whether they are likely to be able to afford the payments if interest rates were to increase.

The firm then needs to consider whether the proposed credit arrangement is suitable for the customer. If the firm holds itself out as giving advice, then it must not recommend an unsuitable solution, even if it has no suitable product available. If the firm has access to a number of suitable products, then it must recommend the most suitable product.

Carrying out credit searches might be an important part of any suitability assessment. However, brokers must not carry out such a search for a customer who has not yet made a decision to apply. Firms should instead have appropriate ‘quotation search’ facilities to allow customers to ascertain the cost of credit were the loan to be taken via particular lenders.

Some examples of what would not constitute suitable advice include:

  • Recommending a loan when it is doubtful whether the customer will be able to make the required repayments on time

  • Exerting pressure on customers to purchase payment protection or other insurance products, or offer undue incentives to do so. Firms must not discourage customers from purchasing such insurance from another firm.

  • Encouraging customers to take out secured credit to replace unsecured credit where this is not in their interests.

  • Encouraging customers to increase, refinance or consolidate their debt if this would lead to the required repayments becoming unaffordable.

Other compliance documentation

We have already looked at the initial disclosure information that needs to be provided. Brokers should provide this information to their clients at the first meeting, or immediately after the first contact if the business is conducted remotely.

In order to carry out the assessments of affordability and suitability, the firm needs to gather comprehensive information about the customer’s financial circumstances. Most firms use a ‘fact find’ or similar document for this. A fact find should include the following details about the customer:

  • Age
  • Occupation
  • Marital status
  • Intended retirement age
  • Total income, together with a breakdown of the various sources of income, e.g. salary, state benefits, maintenance etc
  • A detailed breakdown of household expenditure, showing how much is spent each month on food, clothing, travel, utilities, existing credit commitments etc.
  • Assets, including, if applicable, how much liquid capital is available as a deposit
  • The customer’s detailed borrowing requirements, for example how much do they want to borrow and for how long? Do they wish to have a fixed, or capped rate, or any other special features?

If your firm can offer mortgages or loans from a range of providers, your customer files should also demonstrate what research you have carried out to identify which is the most suitable provider and product within the marketplace.

There is no requirement to issue a summary letter to the customer once any recommendation has been accepted. However, most mortgage brokers believe it is good practice to issue a suitability report or similar, which summarises the customer’s situation, explains why a particular provider and product was recommended and re-iterates the key features and risks of the recommended contract.

Financial promotions

Which set of financial promotions rules applies to which firms is rather complex. It is not simply the case that the rules in MCOBS apply to first charge mortgages and those in CONC to other forms of lending.

This is because the FCA has a concept known as ‘qualifying credit’, and all credit of this type is subject to the MCOBS rules. Qualifying credit is any secured loan offered by a firm which arranges regulated mortgage contracts. So essentially, any communications for second charge secured loans issued by firms who also sell residential first charge mortgages will be covered by the MCOBS rules and not those in CONC.

However, a credit firm that arranges second charge secured loans but not residential first charge mortgages will be subject to the CONC communications rules. And a firm that arranges first charge mortgages and offers a wide range of other credit products will be subject to the MCOBS promotions rules for their secured lending and the CONC promotions rules for their unsecured lending.

The FCA’s rules prohibit cold calling when promoting regulated mortgage contracts. In the case of consumer credit, firms must not make unsolicited calls to people who appear on the Telephone Preference Service register, or to those who have requested not to receive calls.

Key concepts relating to credit promotions include:

  • Many promotions require the Annual Percentage Rate to be disclosed, particularly where the promotion contains other price information, suggests that credit might be available to those who have had difficulty accessing credit, or provides any incentive to take out the credit product
  • In many cases, risk warnings need to be included on the promotion. Examples include:
  • For a regulated mortgage: ‘Your home may be repossessed if you do not keep up repayments on your mortgage’
  • For a secured loan used to consolidate other debts: “THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME”
  • For a payday loan: ‘Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk’
  • Promotions must observe the FCA’s ‘clear, fair and not misleading’ principle. Important information must not be concealed in small print.
  • Promotions must be communicated in plain English. These types of communication must be easily understood by an average member of the group it is aimed at.

Brokers need to check that any promotions they issue comply with the rules. This includes any promotional material that they distribute on behalf of lenders – you should not automatically assume that any material provided by a lender will be fully compliant.

Compliance monitoring

Brokers should have a system in place for monitoring the quality of the sales they make. Are the recommendations suitable and affordable, and do the customer files demonstrate this? Has the sales process been followed correctly, particularly with regard to the disclosure of information to the customer?

Advisers who are yet to demonstrate competence are likely to need a greater proportion of their files checked than would be the case for more experienced colleagues.

If your firm lacks either the resources or the skills to carry out these file checks, then you should strongly consider outsourcing this task to an external compliance consultant.

Having a regular independent audit of your compliance procedures, records and systems & controls is also advised.

Conclusion

The regulatory requirements for brokers are wide-ranging, and the FCA has a range of enforcement penalties available to it. It is extremely important therefore that firms understand their regulatory obligations.

Script 15 – Treating Customers Fairly

Introduction

Treating Customers Fairly (TCF) is a key part of the Financial Conduct Authority (FCA) regulatory regime. Principle 6 of the FCA’s Principles for Business says that ‘a firm must pay due regard to the interests of its customers and treat them fairly.’

This is an extremely generic statement, and as we shall see it has an impact on your business practices in many areas.

The FCA previously prescribed six outcomes which should be met in order for a firm to be compliant with the requirements of TCF. Here we look at each of these six outcomes in turn, and at measures you can take to ensure you comply with your TCF obligations.

The FCA places particular emphasis on the responsibilities of senior management in implementing and maintaining TCF within a firm’s culture. Plans to ensure TCF should be kept under constant review by firms, who should update their TCF plans in line with regulatory developments, changes in FCA guidance on TCF, and as they learn from experience.

The FCA is clear that its TCF obligations do not just apply to larger companies, and that all firms are expected to have TCF embedded within their organisational culture.

The FCA often cite a failure to treat customers fairly on the part of the firm on the occasions when they take enforcement action.

The FCA uses ‘customers’ instead of ‘clients’ in the wording of Principle 6, so for consistency we will also use ‘customers’ to describe the people you do business with. Confusingly, the regulator also uses the word ‘consumers’ in the wording of its TCF outcomes, which we will now look at in detail.

Outcome 1: Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.

  • Ensure your customer is issued with a series of easy-to-read, professional looking documents explaining the product (s) they have purchased and the reasons as to why these have been recommended. Examples of documents you should issue are a key features illustration, a key features document and a suitability report.

  • Whether you are providing a written document or explaining a concept orally to a customer, ensure you provide them with detailed information about any course of action they may be considering. Answer any queries your customer raises. Explain things clearly and concisely and avoid financial jargon wherever possible.
  • Keep in regular contact with your customers to offer follow-up financial reviews where appropriate, and to consider how best to address changes in customers’ circumstances.

  • Ensure your advisers display a professional appearance and professional manner at all times when dealing with customers.

Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.

  • Unless you are the product provider, you are unlikely to have any input in design of products.

  • However, it is vitally important that the product marketing you carry out is appropriate.

  • You should try and carry out a segmentation exercise with your customer base. Customers may be segmented according to: age, location, income, total assets, occupation, family circumstances, length of time they have been a client, type of products purchased, typical risk level they have wanted to take with their investment or level of investment knowledge.

  • Once you have done this you can market the appropriate products to the right customers. You should not be marketing higher risk products, e.g. investment trusts and structured products, to customers who would wish to have capital security. A number of investment vehicles are strictly for sophisticated investors only, and you should therefore not be marketing these to inexperienced investors. Examples include unregulated collective investment schemes, derivatives, contracts for difference and enterprise investment schemes.

Outcome 3: Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.

  • If you issue financial promotions, all the information on these needs to be ‘clear, fair and not misleading’. The promotions must comply with the rules in the relevant part of the FCA Handbook. Remember that your website is a promotional tool every bit as much as a newspaper advertisement or flyer is, and so all your website content needs to comply with the rules and meet the ‘clear, fair and not misleading’ principle.

  • At the start of the sales process, you should set out clearly the terms on which you will do business with the customer. Fees to be charged need to be agreed at this stage, after you have explained all of the various fee charging options. Your client agreement or other initial disclosure document needs to give cash examples of fees, and of course all fees charged need to be reasonable and reflect the costs of doing the work on the customer’s behalf.

  • Ensure that your customers are provided with the necessary Key Features Illustrations and Key Features Documents and other appropriate information about the recommended product (s) before they are required to complete any application documentation.

  • Your advisers should provide all possible assistance to customers when they are required to complete application documentation.

  • Every customer who purchases a product via your firm should receive a comprehensive Suitability Report. This report will: summarise the customers’ needs and circumstances, clearly set out how the recommended product meets those needs and why the product has been recommended, give the key information and risk warnings relating to the product and state the cancellation rights applicable to the product. While these Suitability Reports are intended to be comprehensive documents, your advisers are expected to ensure they are as clear and concise as possible, and that financial jargon is avoided wherever possible.

  • Your advisers need to keep in contact with their customers. They need to offer the customers regular reviews of financial circumstances and to provide the necessary ongoing customer service. Remember that a client may be paying a regular fee for a certain level of ongoing service, and you need to make sure you provide at least that level of service, and that you provide it at the right times.

Outcome 4: Where consumers receive advice, the advice is suitable and takes account of their circumstances.

  • Your advisers need to gather comprehensive information on customer circumstances via an in-depth fact-find document or similar, so they can ensure that Know Your Customer requirements have been met, that affordability has been established and that their recommendations are suitable.

  • Your advisers also need to carry out extensive research for each case, which should demonstrate that the recommended product, provider and fund (where applicable) are suitable for the customer.

  • Your firm should have a robust system for monitoring the activities of its advisers. This should include regular file reviews and monitoring of any trends in an adviser’s business. On-site observations of client interviews can also be useful, as it could highlight issues regarding the way advisers handle themselves in front of customers, the way they explain things, the procedure they follow etc. An adviser monitoring programme should be risk-based, and those advisers and products which your data indicates are higher risk should receive additional levels of monitoring.
  • All file reviews must be carried out by a suitably qualified and experienced person. Appropriate staff resource may be available within the firm to do this, but if not, you need to engage the services of a third party consultant.

  • If your file reviewer recommends that corrective action is completed on a client file, ensure that the adviser carries out these actions. The reason the reviewer may have raised a concern is that they cannot be sure that the advice given is suitable based on the information provided so far. Leaving the file unaltered could leave you at risk of having a complaint from that customer upheld, or of the FCA inspecting the file and finding issues.
  • Your advisers should undertake ongoing testing, assessment, training and development to ensure they remain competent to give advice; and that they remain up to date with regulatory developments that could affect what is deemed to be suitable advice.
  • You should regularly review your management information. If an adviser has poor statistics in an area such as file review grades, product mix, provider mix, persistency or complaints received, this could indicate an issue regarding the suitability of their advice. An area of concern in adviser’s MI should be discussed with them, perhaps at a regular performance review meeting, and where appropriate an action plan to improve performance should be put in place.

Outcome 5: Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.

  • This applies to product providers and so most of this is probably not relevant to your firm.

  • But note the reference to ‘products that perform as firms have led them to expect’. As the adviser, you are obviously not responsible for the performance of an investment fund, but you must ensure that you do not mislead your customers as to what returns they might expect. Your customers should be made aware of the likely scale of any gains and losses they might experience by investing in a particular area, and any recommendation must be consistent with their risk profile.

Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

  • Most of this may not be relevant to your firm if you are not a product provider. But the complaints part is certainly relevant. You must make sure that you never impose any barriers on those wishing to make a complaint. For example, you must accept the customer’s expression of dissatisfaction in the form it is received. You cannot ask a customer who complains by email, fax or text; via the website; on the phone; or in a face-to-face communication to put their concerns in writing before it will be looked at. Similarly complaints received on a customer’s behalf from family members, claims management companies and lawyers must be treated as if the customer themselves had aired the same grievances.

  • If you receive of an expression of dissatisfaction that meets the FCA definition of a complaint, then you must fully implement your documented Complaints Procedure.

  • This includes gathering full details of the complaint, investigating the matter as thoroughly as possible and as quickly as possible, making a decision which reflects the available evidence and, where deficiencies are identified, making a fair offer of redress to the customer that adequately reflects the loss they have suffered.

  • In the event that the complaint is passed to the Financial Ombudsman Service (FOS), you must comply fully with all requests for information from the FOS, and comply promptly with any redress instructions given by the FOS once the process has been completed.

Conclusion

If your customers know they are being treated unfairly, they will cease doing business with you. But many TCF issues identified by the FCA concern areas where the customer may not know that they are being treated unfairly. If the regulator thinks you are not putting the customer first, and perhaps regard making a profit as a higher priority, it can take action against you. Have a look at some of the Final Notices on the FCA website where firms have not treated their customers fairly.

Hopefully this film has given you some helpful tips as to how you can ensure your own customers are being treated fairly.

Mention has been made above of some firms choosing to use the services of an external compliance consultant for their file reviews. Even if you choose to perform this task in-house, having a regular audit of your systems, controls and procedures from a compliance consultant can be extremely valuable. A consultant can identify ways where you may not be treating your customers totally fairly, and recommend steps that can be taken to address this.

Script 16 – Financial Services For Administrators

Every member of staff in a financial services organisation needs to know something about the industry. Here we will look at some basic topics, but each firm needs to think carefully about what training it needs to provide to its administrators.

In areas of financial services where the advisers need a certain level of qualification to carry out their role, it may be desirable for the administrators to also hold a qualification, albeit at a more basic level. The Institute of Financial Services, for example, has a Level 3 qualification called Certificate for Financial Administration and Planning; while advisers take the Level 4 Diploma For Financial Advisers exam.

Regulation

Almost all areas of financial services in the UK are regulated by the Financial Conduct Authority (FCA). A firm wishing to engage in financial services activity needs to apply to the FCA for authorisation. Key persons such as the firm’s directors, senior managers and financial advisers also need to obtain individual approval from the FCA.

Once approved, the firm needs to comply with the detailed rules and principles set out in the FCA’s Handbook. Perhaps the best known and most important of the principles is to treat customers fairly at all times. The detailed rules cover areas such as provision of information to clients, systems and controls, advice standards, complaints handling and promotional materials.

The FCA supervises firms to ensure that they are meeting its requirements. Your firm will need to submit regular data returns to the FCA, and the FCA may visit your firm, or ask for information to be provided via telephone or online.

If the FCA finds that your firm has broken the rules, it may take disciplinary action. The FCA has the power to:

  • Issue a warning to your firm and/or its key individuals

  • Impose a fine on your firm and/or its key individuals

  • Cancel your firm’s authorisation to trade and/or ban its key individuals from working in financial services

  • Initiate criminal prosecutions

What is advice?

Advice, in a financial services context, does not quite mean the same thing as it does in everyday life. It involves much more than just giving general guidance. The FCA defines advice as making a recommendation to a specific customer to purchase a particular product or service.

So recommending that Mr Smith buys a whole of life insurance policy with a named insurer, with added benefits such as waiver of premium and escalation, does constitute advice. Making a generic recommendation that an individual should buy some life insurance is not advice under the FCA definition, even though most members of the general public would regard it as such.

Required documentation – for financial advisory firms

At various stages of the financial advice process, your firm needs to complete various documents, some of which you will need to provide to the clients. As an administrator, you may be asked to assist in this process.

Initial disclosure –

An adviser should not commence a review of a client’s circumstances without first setting out in writing the terms on which they will do business with them. This may be achieved by issuing documents with names such as Client Agreement, Initial Disclosure Document, Terms of Business or Services & Costs Disclosure Document. Your firm may use just one of these documents, or a combination of two or more documents – the important thing is that the necessary information is communicated to the client.

Information the firm needs to disclose at this stage includes:

  • The name of the firm

  • Who regulates it, usually the FCA

  • Whether the firm offers independent or restricted advice. Independent advice means that its advisers assess products from all relevant product categories, and from all providers, before giving advice to clients. Restricted advice means that the range of products and/or the providers the firm looks at are restricted in some way, e.g. using a set panel of providers or only offering certain product types. If the firm is restricted, it needs to clearly set out the nature of the restriction.

  • How the firm is remunerated for its advice. Other than for insurance and mortgage advice, receipt of commission payments is not permitted, and so the firm needs to be remunerated via fees paid by the client every time it gives investment or pension advice. The disclosure documents need to set out how these fees are calculated, e.g. a percentage of the investment or an hourly rate.

  • How to make a complaint against your firm

  • The measures your firm has in place to protect clients’ personal data

Fact find –

Your firm will almost certainly use a fact-find of some sort. The adviser needs to gather sufficient information about the client to be able to advise them correctly. Information that will be collected includes:

  • Personal details, such as age and occupation

  • Age and expenditure

  • Existing policies

  • Their needs, goals and priorities

  • The level of risk they are prepared to take with any investment

Research –

This is where the adviser looks into what products and providers will offer the best deal for the customer. Documentary evidence of this research needs to be retained.

Key features illustration –

This document is issued for most types of product, and shows the key information about any products recommended, such as provider name, product name, premiums, investment funds and any adviser fees deducted from the amount invested.

Key features document –

Whereas the key features illustration is tailored to the circumstances of the recommendation and the client’s circumstances, this is a generic document obtained from the product provider, containing comprehensive information about the product.

Suitability report –

After any financial review that results in at least one product being sold, the adviser needs to write a comprehensive letter to the client. These documents are often called Suitability Reports, but your firm may use names such as Suitability Letter, Reasons Why Letter or Demands and Needs Statement. The report is likely to cover areas such as:

  • A summary of the client’s circumstances

  • The products recommended, together with key information such as premiums, the length of the policy and the investment funds utilised

  • The reasons why these products were deemed to be suitable for the client

  • Risks of the products recommended

  • The fees charged

  • The terms on which the recommended products can be cancelled

Complaints

All staff within a financial services organisation, from the chief executive to the most junior staff, need to know how to recognise a complaint, and what to do upon receiving it.

A complaint is defined as:

Any expression of dissatisfaction, whether oral or written, and whether justified or not, from or on behalf of an eligible complainant which alleges that the complainant has suffered (or may suffer) financial loss, material distress or material inconvenience.”

To clarify some of the terms used in this definition:

Whether oral or written’ – this means that complaints must be accepted in the format they are received, e.g. letter, telephone, fax, email, face-to-face, etc. You cannot ask a person who complains by telephone to put their concerns in writing before any action will be taken.

From or on behalf of’ – Complaints may be received from relatives, claims management firms, solicitors etc, and these must be handled in the same way as if the client themselves had made the complaint.

Eligible complainant’ – you should expect all of your firm’s clients to be eligible complainants

Financial loss, material distress or material inconvenience’ – the first of these is relatively straightforward, as clients often state in their complaints that they believe they have been sold the wrong product (mis-selling), or explicitly state that they believe they have lost money as a result of your firm’s actions. Material distress and material inconvenience are more subjective matters, but here consider whether the customer is alleging that the incident had any effects on their life other than financial ones. If in doubt, report the complaint anyway to your firm’s nominated complaints contact.

Your firm should have a documented complaints procedure which explains how the complaint will be handled, and which should include the name of the person within the firm that you should pass the complaint to.

Money laundering

Criminals have to find a way of making the money they get from their criminal activities ‘clean’. They try to launder their ‘dirty money’ by getting it into the financial system without detection or arousing suspicion. If they can get their ‘dirty money’ into the financial system they can then transfer it between different bank accounts or financial products in the UK or abroad, or use it to buy goods and services. The idea is to make the ‘dirty money’ look like it has come from a legitimate source. This process is known as money laundering, and you need to be vigilant for any attempts by criminals to use your firm to assist in the laundering process.

The following could all be indications of money laundering activity:

  • If the customer appears to be more interested in the short-term cancellation rates rather than the benefits of the policy

  • If the customer overpays premiums and requests refunds

  • Transactions which suddenly dramatically increase in value or seem inconsistent with the customer’s legitimate business/personal activities

  • If the customer wants to make foreign currency payments, or transfer funds overseas, without any apparent commercial objective

  • If the customer wants to make payments from or settlements to the account of a third party without any apparent legitimate reason for doing so

  • If the customer seems determined to enter into financial commitments well beyond their means

  • If the customer is introduced by agents in countries noted for drug production or terrorism

  • If the customer assigns policies to apparently unrelated third parties

All suspicions should be reported immediately to your firm’s Money Laundering Reporting Officer. Failure to report your suspicions is a criminal offence. Ensure that you do not tell anyone else about your suspicions, not your colleagues and certainly not the client concerned.

Data protection

Working in financial services inevitably means you will see personal information about the firm’s clients. Everyone within the firm who processes personal information must:

  • Comply with the eight Data Protection principles, which require personal information to be:

  1. Fairly and lawfully processed

  2. Processed for limited purposes

  3. Adequate, relevant and not excessive

  4. Accurate and up to date

  5. Not kept for longer than is necessary

  6. Processed in line with your rights

  7. Secure

  8. Not transferred to other countries without adequate protection

  • Inform the person within the Firm who is responsible for Data Protection if a subject access request is made by an individual using their right under the Data Protection Act. (All clients have the right to see the information a firm holds about them).

  • Ensure that customers are given the Terms of Business document or similar which outlines how their information is going to be processed. This is to make sure the individual knows exactly what is going to happen to their information and how it is going to be used.

  • Not allow another person to make changes to another’s policy or contract unless the policyholder sends written authorisation for this person to act for them

Conclusion

As an administrator you are not in a position of great responsibility. The FCA will not hold you to account when things go wrong in your firm. But you do need a basic technical grounding in the way financial services and its regulatory system operates.