Consequently, 2021 is scheduled to be busy on the regulatory front, with many rule changes that were deferred now due to be implemented in the year ahead. In this update, we will focus on the first half of the year, to see what is coming down the track for advisory firms and what preparation is required.

Firstly, there are a number of new rules that came into force on the 1st February, starting with the deferred final policy statement on the Retirement Outcomes Review PS19/1. Under these rules, firms are required to guide customers towards investment solutions tailored to four broad retirement income behaviours. Although these rules apply to non-advised clients, advisers will need to evidence that they have considered the investment pathways available to the client and the suitability and value for money of any alternative personal recommendation. Our Technical Services & Research Team has provided Tenet advisers with guidance.

This is joined by the deferred policy statement on PS19/29 - Making Platform Transfer Simpler. This is a package of rules for platforms to make it easier for consumers to move from one platform to another without liquidating their assets. These changes should be beneficial for advisers in ensuring that, subject to individual suitability assessments, clients are on the most appropriate platform for their needs. Again, straightforward guidance on these rules has been provided, so our advisers don’t have to spend time interpreting the new rules.

Finally, 1st February also saw the implementation of 13 new rules for providers on costs disclosure for pension decumulation under COBS 16.6.10. This ensures a consistent approach for pension providers to illustrate to policyholders the costs and charges they have paid. This statement will be provided on an annual basis from the provider, so there is no action for advisers, other than an awareness of the charges disclosure.

31st March marks two key deadlines, the end of the Coronavirus Job Retention Scheme and the final date for implementing all outstanding elements of the Senior Managers and Certification Regime (SM&CR) for solo-regulated firms.

In relation to the SM&CR, the following requirements were officially extended from 9th December 2020 to 31st March 2021, by which point firms must have:

1. Completed initial fit and proper assessments for certified staff;
2. Provided all relevant staff with Conduct Rules training;
3. Submitted details of Directory Persons data via Connect or bulk upload spreadsheet.

For support on implementing these requirements, our directly authorised members can refer to our dedicated SM&CR zone on the extranet.

The end of the Coronavirus Job Retention Scheme means that advisers need to be ready for increased enquiries and alert for signs of vulnerability across all sectors of their customer base. Don’t forget that our free Tenet Assistance Programme offers access to counsellors and specialists, to help advisers with issues around anything from debt counselling to HR advice.

There are also a number of pending rules with no set dates, other than the first half of the year. These include:

1. Rules implementing EU regulations on Environmental, Social and Governance (ESG) investments;
2. A consultation paper on effective competition in non-workplace pensions;
3. The FCA GI market study and a policy statement prohibiting the sale to retail clients of investment products that reference crypto assets;
4. FCA Finalised Guidance on the fair treatment of vulnerable customers.

Tenet will of course keep its advisers updated as soon as any set dates are announced and provide related guidance and support as required.

Finally, that leaves us with the 6th Anti-Money Laundering Directive, which came into effect on 3rd December 2020, and must be enforced by all regulated financial institutions by 3rd June 2021. This directive includes expanding the list of predicate offences (offences which are part of a larger crime) to include 22 different crimes, which now directly constitute money laundering, brings in changes to criminal liability and sets the minimum prison sentence for anyone found guilty of money laundering to four years – where it had previously been just one year.

Following a year that was largely light on regulation due to the pandemic, the first half of 2021 is scheduled to be a heavier one and advisers need to plan ahead to ensure they are balancing their workloads.

The intention was to highlight the importance of being able to justify fees that are received through the delivery of service agreements. Industry news recently has included a national advice firm which has been completing a programme of repaying fees to clients who had not been receiving a service. The amount of fees repaid is understood to have been £530,000. We cannot comment on the circumstances surrounding this repayment exercise, but the news serves to remind advisers that ongoing advice fees entail obligations that need to be met.

Suitability review

Where an ongoing advice fee is being paid this means there is an ongoing relationship with the client. This relationship confers the need to undertake a periodic assessment of suitability. In order to complete a suitability assessment an updated Know Your Client (KYC) process is required i.e. update the fact find. You will need to know what the client’s current situation is to be able to advise.

In most circumstances this will mean that there is an obligation to complete at least an annual review. Indeed, this is a specific requirement under MiFiD. Consideration also needs to be given as to whether the client’s circumstances warrant more frequent reviews. COBS 9A.3.9 states: ‘Investment firms providing a periodic suitability assessment shall review, in order to enhance the service, the suitability of the recommendations given at least annually. The frequency of this assessment shall be increased depending on the risk profile of the client and the type of financial instruments recommended.’

You need to ensure there are sufficient systems and controls that manage this process with the review schedule being appropriately diarised. Review meetings do not necessarily need to be face to face, preferences and requirements should be agreed with each client. Once updated KYC is obtained a report can be provided with any personal recommendations and to reconfirm suitability.

Non-responders

There may be occasions where clients do not respond to the offer of an annual review, or decline to complete the process. In this scenario there should still be follow up correspondence to confirm that the review has been offered but declined, and that as a result you are unable to confirm continuing suitability of their arrangements. As well as identifying that their financial arrangements may no longer be fully in accordance with their needs it should highlight that they are continuing to pay fees but are not benefiting from all aspects of the service. We would recommend that comment is included that the client may wish to consider whether they want to continue on the same service agreement basis.

You should establish the reasons for a review process being declined as this may affect the timing or circumstances of future contact. Just because a client may not want to, or be able to, complete an annual review does not automatically mean that they have disengaged with your services. The client choosing to miss one annual review in this way would not automatically mean payment of ongoing advice fees should be ceased. What is important is to be able to demonstrate that the review has been offered and the circumstances why it did not go ahead are legitimate and client led. This should, of course, be fully documented with relevant file notes, records of telephone calls and emails etc. Your file should show that best endeavours have been taken to complete the review process.

Consideration needs to be given to the point at which a non-responding client requires a re-assessment of their servicing arrangements, and the ongoing fee. Where clients do not engage with your services for two or three years it may be that the service agreement should be cancelled. We would recommend that you have a documented policy in this regard and can demonstrate it is applied consistently.

If the reason a review meeting does not go ahead is because it has not been offered to the client then this would be an issue. If an annual review, is missed due to an administrative oversight on behalf of a firm, then efforts should be made to re-schedule as soon as is practicable.

If a firm is unable to meet its servicing commitments due to a lack of resource, then action would need to be taken. This may be to increase relevant resources so they are able to complete the reviews. Alternatively, the firm could consider alternative servicing arrangements for relevant client groups, bearing in mind that simply disengaging with them may not be in line with TCF or the client’s best interests. Fundamentally however a firm should not continue to receive ongoing advice fees if it is not providing the commensurate service in return.

Other services

You should ensure that any other commitments within your service agreement are being delivered. If the client has signed an agreement that promises quarterly newsletters, for example, then these need to be provided.

Delivering value

The rules regarding adviser charges are clear. Among other things, these state that:

• In determining its charging structure and adviser charges a firm should have regard to its duties under the client's best interests rule (COBS 6.1A.13); and
• To meet its responsibilities under the client's best interests rule and Principle 6 (Customers’ interests): a firm should consider whether the personal recommendation or any other related service is likely to be of value to the retail client when the total charges the retail client is likely to be required to pay are taken into account (COBS 6.1A.16).

Pricing of services is a commercial consideration for each firm to decide. The FCA highlighted in the RDR and FAMR evaluation their concerns about price clustering, noting that 80% of clients are charged ongoing fees of 0.5%, 0.75% or 1%. It also noted how a charge at 1% typically does not have noticeably different features to one charged at 0.5%. Advice fees and overall costs have been a focus of much FCA activity recently, including their DB work and the RDR/FAMR evaluation. It may be expected that ongoing advice fees will feature in the FCA’s Assessing Suitability Review 2, which has been put on hold due to COVID-19. All of which serves to highlight the importance of being able to demonstrate that value is being provided for the associated fee.

Demonstrating value is likely to require three considerations:

• Are services actually being delivered?
• Are the services that are being provided what were originally promised?
• Are the services appropriate for the client segment?

In relation to the last point, product governance is covered in the PROD section of the handbook.

PROD 1.1.3 identifies that:

‘good product governance should result in products that:

• meet the needs of one or more identifiable target markets;
• are sold to clients in the target markets by appropriate distribution channels; and
• deliver appropriate client outcomes.’

You should be able to show what your client’s value in the services you provide, that there is clarity on what will be provided and that ongoing services are appropriate for their needs. Pricing should be fair and reasonable. The FCA would expect firms to be able show that they have completed a genuine assessment of the costs of providing a service, and that the resulting fees deliver value for money for clients. A charging structure that has been chosen because ‘That’s what other firms charge’, or even because ‘That’s how much I can get away with charging’, is unlikely to meet FCA and client’s best interests requirements.

Tenet Compliance Services support

It is clear that providing ongoing servicing is a critically important area. Shortcomings run the risk of dissatisfied clients and regulatory censure. Ultimately, if a client is paying for a service, but they do not receive that service, firms will need to look at repaying fees.

You should regularly review your firm’s provision of ongoing services and charging structures to ensure they underpin both your firm’s profitability and client understanding of value. It is not unusual for an effective charging structure and service model to evolve over time.

We can assist firms in in assessing the extent to which they are fulfilling their commitments under ongoing service agreements. We can review client segmentation, service agreement design, and implementation. Focused file reviews can be completed to assess how review requirements are being completed in practice. We can provide a full report on findings with detailed recommended actions.

Find out more about our file review service and other services for directly authorised businesses. 

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