Regulatory Matters July/August Event

Regulatory Matters July/August Event - 2014
Welcome to todays Bankhall Specific ‘Regulatory Matters’ Event which we hope that you will find useful. We anticipate this afternoon’s session will take around 1.5 hours and at the end of the presentation we will ask you for your feedback about today's presentation via the use of the handsets you have been provided with. This feedback is important to us so that we can ensure that the events we are proving to you are of benefit to you and your business. Regulatory Matters July/August Event

Compliance Bulletin and Regulatory Analysis Updates

Regulatory Matters Regulatory Update
Bankhall issue three types of Compliance Communication: Weekly Regulatory Update (RU), every Monday, ‘Bankhall Weekly’ - ‘High-level’ summary of regulatory information drawn from FCA, FOS etc Monthly Compliance Bulletin - on the last Thursday of each month - Summary of important information issued via the weekly regulatory updates within the month; - A summary of all new and amended compliance guidance published within the month. Ad-hoc Regulatory Analysis - Further in depth analysis when required on key topics Rag rated (Red, Amber, Green) to highlight issues that we feel are particularly important In response to your feedback, we have returned to issuing a more comprehensive monthly Compliance Bulletin, via on the LAST THURSDAY of each month. These contain a round up of: * Information relevant to investment, mortgage & GI firms; * A summary of the important information issued via the weekly Regulatory Updates within the month; * Further in depth Regulatory Analysis, where required, including guidance on what you need to consider and/or do differently, following regulatory changes; and * A summary of all new and amended compliance guidance published within the month. Information is drawn from FCA, FOS and various regulatory publications Designed to help you identify anything that has come to light that week which may have implications on your business. The REGULATORY UPDATE also provide information about the next steps to be taken, for example if further analysis and guidance will follow within a Compliance Bulletin, it will say so. The REGULATORY UPDATE also provide a summary of all new and amended compliance guidance published within the previous week, including the reasons for the change; and any other information we think you need to know. It’s a general WEEKLY NEWSLETTER IT IS WORTH NOTING AT THIS POINT THAT ALL ARTICLES PUBLISHED ARE RAG RATED – [RED, AMBER AND GREEN] TO HIGHLIGHT THE ISSUES THAT WE FEEL ARE PARTICULARLY IMPORTANT OR REQUIRE ATTENTION Finally a REGULATORY ANALYSIS is issued on an ad hoc basis whenever Slide Objective To remind everyone that this is currently how we issue our regulatory communications: The Slide Note: Highlight RAG rating of articles. Highlight that if a firm wants to opt in to the publications then they need to let us have their details – maybe get their business card at the end of the session? Bankhall issues THREE types of Compliance Communication A weekly REGULATORY UPDATE is issued every Monday – This is a ‘high-level’ summary of important regulatory information issued within the previous week. This information is drawn from FCA, FOS and various regulatory publications as well as the trade press Designed to help you identify anything that has come to light that week which may have implications on your business. The REGULATORY UPDATE also provide information about the next steps to be taken, for example if further analysis and guidance will follow within a Compliance Bulletin, it will say so. The REGULATORY UPDATE also provide a summary of all new and amended compliance guidance published within the previous week, including the reasons for the change; and any other information we think you need to know. It’s a general WEEKLY NEWSLETTER We also issue a more comprehensive monthly Compliance Bulletin, via on the LAST THURSDAY of each month. These contain a round up of: * Information relevant to investment, mortgage & GI firms; * A summary of the important information issued via the weekly Regulatory Updates within the month; * Further in depth Regulatory Analysis, where required, including guidance on what you need to consider and/or do differently, following regulatory changes; and * A summary of all new and amended compliance guidance published within the month. Finally a REGULATORY ANALYSIS is issued on an ad hoc basis whenever a key issue arises requiring a more in depth analysis IT IS WORTH NOTING AT THIS POINT THAT ALL ARTICLES PUBLISHED ARE RAG RATED – [RED, AMBER AND GREEN] TO HIGHLIGHT THE ISSUES THAT WE FEEL ARE PARTICULARLY IMPORTANT OR REQUIRE ATTENTION So, if you don’t read the Regulatory Updates, it’s vitally important you read the Compliance Bulletins. We would also suggest that you retain evidence of reading the bulletins and updates in case you ever need to demonstrate how you keep on top of changes. If you are not receiving these communications and would like to, please Moving on to some of the key issues highlighted over the past couple of months……………… Sesame Bankhall Group Ltd. Commercially confidential

Mortgage Market Review Implementation date 26th April 2014 Dedicated suite of templates within Bankhall website On site compliance support available if required New FCA consumer guide and AMI / CML / IML joint guide published (CB 21/14) Consumer Credit Regulation 1st April - transferred from the OFT to the FCA. Firms with interim permission must apply for full FCA authorisation / VoP The FCA has written to all firms with details of own specific application period. FCA indicated that an ‘authorisation pack’ will be made available (RA30/14 and CB 24 / 14) Slide Objective MMR The objective of this slide is to: Remind firms that MMR is now live as of 26th April and that if they undertake any mortgage activity then they must now be operating under the new regime. Inform firms that the FCA is going to be conducting a review on the MMR starting in Q4 2014, which will look at advice and lending – firms need to ensure they are adhering to the new rules. Highlight recent publications issued by AMI CML / IML and note the Bankhall publications that the firms can reference for further information. The slide Bankhall Support All of the new MMR guidance and templates can be currently accessed from the dedicated MMR guidance section of Bankhall online. We will be moving the post-MMR documents into the main mortgage section of the compliance manual in order to combine the pre and post MMR information. New Publications The Association of Mortgage Intermediaries, the Council of Mortgage Lenders and the Intermediary Mortgage Lenders Association have jointly produced an new guide – ‘An Industry Guide to Lender and Intermediary Accountabilities and Responsibilities in Mortgage Sales and Services’. The aim is to ensure that the relationships in which lenders and intermediaries are engaged, deliver good customer outcomes. The publication sets out to define how good practice should look today, is aligned with FCA rules and will evolve over time. Well worth a read and there is a link to it in the Compliance Update dated 25th April 2014. The FCA has published a simple guide to explain the new mortgage lending rules to consumers, can be found via RU 18th April 2014 There have been numerous communications covering this but CB 21/14 covers everything off CCL Firms should already have applied for and received their interim permission and potentially correspondence from the FCA with regard to any refund due to them from their old CCL and date by which they will need full permissions. Policy Statement (PS14/3) sets out the FCA’s final rules for its consumer credit regime. However, given that these rules will apply to all consumer credit firms (which will include firms who are not currently regulated by the FCA), the majority of these final rules will not be ‘new’ to firms who are already regulated by the FCA. Whilst many of the standards currently in place from the Consumer Credit Act (CCA) and the OFT have been transferred across to the FCA, the FCA has set higher standards for certain types of firms e.g. payday and other high cost short-term lenders and debt management firms. FCA has indicated that it may offer the choice of an earlier ‘slot’ for firms that indicated that they were looking to become a principal firm at the time it registered for interim permission. Interim Permission will continue until the firm has completed the fill application process with the regulator and as noted, firms should have or will receive notification of their own individual application timescales by letter from the FCA. Compliance Bulleting CB24/14 provides details and links, including the FCA online application form During the interim permission period, the FCA’s supervisory approach will be similar to its normal 3 pillar model – with a greater emphasis on focused firm visits. As firms move through the authorisation process, they will fall into the FCA’s normal model. Sesame Bankhall Group Ltd. Commercially confidential

(RA37/14 and RU week ending 6th June 2014)
Regulatory Matters Regulatory Update FCA supervision on post RDR implementation FCA three stage process. Stage 1 published July 2013 – Adviser Charging and Disclosure Stage 2 published May 2014 – Independence and Disclosure Stage 3 commences July Disclosure FCA firm charging structure review form – Disclosure to clients Assessment tool Planned to be used by FCA in stage three of review process Interactive Excel and PDF checklist versions Various categories covered (RA37/14 and RU week ending 6th June 2014) RA 37 / Slide Objectives The latest developments of the FCA supervision, on post RDR implementation. The slide As most of you should be aware the FCA are carrying out a series of reviews post RDR to identify the affects of the regulation and how firms have adopted the changes as required. The first stage was carried out in 2013 and now the second stage has been completed. This review looked at independence and whether firms describing themselves as independent were actually carrying out independent services in practice. Additionally the review looked at client disclosure which included the firms clarity of charges and services on an initial and ongoing basis. This review was covered in detail at our last presentation, but for those who were not there or who require further information, this can be found on the Bankhall analysis paper RA37/14. To assist firms with there assessment of their disclosure to clients to meet regulatory requirements, the FCA has made available an assessment tool. In the thematic review, the FCA identified many failings and stated that the findings were unacceptable and would expect to see significant improvements. The FCA plans to use the tool when it carries out the third stage of the review process, which is due to commence mid-July The FCA have stated that it will consider further regulatory action against firms that are failing to be sufficiently clear with their clients. The template tool is available in an interactive Excel format or as a PDF checklist and splits into various categories including; Generic charging structures Client specific charging structures Generic disclosure of charges Disclosure of scope of services Disclosure of ongoing services and Disclosure of general services Although not compulsory, it is recommended that all firms should carry out assessments utilising the tool and evidence the assessment on file, obviously carrying out any remedial action where issues are identified. Firms need to test their systems and controls in the light of this to ensure that they are adhering to the rules on disclosure. Links to the tool and further information can be found on the Regulatory update, week ending 6th June. HIGH LEVEL ONLY _ THIS WILL BE COVERED IN MORE DETAIL LATER IN MAIN SESSION Sesame Bankhall Group Ltd. Commercially confidential

FCA alert on SIPP advice FCA concerns in January 2013 Further supervisory work, including visits and appropriate action FCA has issued a further alert (RU week ending 2nd May 2014) FCA concerns about risk profiling Ongoing FSA / FCA supervisory work Failings found in earlier work carried out - ongoing issues Issues identified at the time of file reviews Support available (RU week ending 16th May 2014) Slide Objectives To bring to firms attention further FCA concerns in respect of SIPP advice The slide ALERT ON SIPP ADVICE The regulator raised concerns on 18th January 2013 in respect of firms carrying out pension switches to SIPPs, without giving due consideration and assessment of the client with regard to the underlying investments in the new product, also taking into account all disadvantages. The FCA have issued a new alert as a result of further supervisory work conducted, which included visiting some firms to assess whether business activities met with requirements. The FCA identified, through these visits, serious and ongoing failings, which resulted in action taken to stop a large number of firms carrying out these business activities. Generally the FCA found very poor standards of advice, especially where underlying investments in the SIPP were in non-mainstream investment products. Highlighted once again was a failing by firms to adequately assess the clients circumstances, overall financial position, needs, objectives and attitude to risk. The FCA have noted that their work on this issue is ongoing, therefore firms should ensure that all of their procedures and processes are robust and compliant to ensure that regulatory requirements are met at all times. The FCA have stated that they anticipate further regulatory action against firms in the future, Further detail can be found on Regulatory update, week ending 2nd May RISK PROFILING The FCA have again raised concerns over risk profiling of clients. Work has been ongoing in this area for years. A report was issued in 2011 by the FSA after client file assessments were carried out between March 2008 and September Major failing were identified, which included poor client assessment and lack of consideration for the clients capacity for loss. The FCA have stated that they still have concerns, as in their day to day supervisory work they continue to see problems. If you speak to any Bankhall Compliance Consultant, they will confirm that when carrying out file reviews, the area of client Attitude to Risk, is an area which is one which some firms still fail to address adequately and can cause issues at the time of complaint or investigation. Given that the FCA have again noted this issue and will be considering on an ongoing basis, it is essential that firms ensure that their procedures and processes are robust to meet all requirements and that client files fully evidence all compliant business activity. Guidance is available through Bankhall and use of Bankhalls Investment Risk Profiler is recommended for firm to ensure all regulatory requirements are met. HIGH LEVEL ONLY _ THIS WILL BE COVERED IN MORE DETAIL LATER IN THE MAIN SESSION Sesame Bankhall Group Ltd. Commercially confidential

(RU week ending 9th May 2014, Compliance bulleting CB24/14
Regulatory Matters Regulatory Update The transfer of clients to post-RDR unit classes (‘clean’ units) FCA final guidance, FG14/4 Ban on payments to platforms effective 6th April 2014 Ban on legacy payments effective 6th April 2016 Move to new ‘clean’ unit classes. Conversion or switch What is advice ? (RU week ending 9th May 2014, Compliance bulleting CB24/14 RA 00001/14) Slide Objectives To ensure firms are aware of when actions constitute advice and the implementations of the ‘sunset clause’ (ban on ongoing legacy payments 6th April 2016) The slide Following RDR changes adviser charging which resulted in the introduction of new unit classes, widely known as ‘clean’ unit classes, the FCA have issued final guidance on what it expects from firms involved with clients transferring from pre RDR to post RDR unit classes. This final guidance can be referenced on the FCA website under FG14/4. Main points to cover: Since April 2014 any Unit Trust/Oeic business written on a platform has to be to purchase the clean share classes of a fund. On the 6th April 2016 any legacy payments from a fund to adviser facilitated via a platform will be banned. By 2016 all funds paying ongoing legacy payments will need to have been changed to clean share classes with an ongoing adviser charging agreement in place. The FCA have noted that in most cases the move to clean unit classes will be carried out by way of conversion rather than switching. If a ‘conversion’ to a clean share class is carried out by a platform, then this is not deemed to be advice. If an adviser makes a recommendation to a client to ‘convert’ then this would be advice and would fall under the usual compliance requirements. For more on this, further details and analysis can be found on RU week ending 9th May, Compliance Bulletin CB24/14 and regulatory analysis RA 00001/14, which are all available on Bankhall online. Note: We don’t want to get bogged down here in technical discussions around what is ‘conversion’ and what is ‘switching’. If we get any questions on this then refer the adviser to the Bankhall tech team – it is just too techy and not something to go into here. Sesame Bankhall Group Ltd. Commercially confidential

Commercial insurance intermediaries - conflicts of interest and remuneration FCA thematic review (TR 14/9) published - (RU 30th May 2014) Seven of the largest intermediaries who serve small business clients assessed FCA believe control frameworks and management information have not developed at the same pace as business models. Increased risk of conflicting interests where firms acted as agent for both the customer and insurer in the same transaction Reliance on disclosure as main way to address conflicts of interest rather than having effective control frameworks in place Disclosure generic and unlikely to meet information needs Bankhall Regulatory Analysis to follow Slide Objectives To ensure firms are aware of when actions constitute advice The slide This is really a ‘heads up’ to those of you who conduct commercial insurance. By commercial insurance we are not talking about mortgage related insurance such as Term, CIC, Family Income Benefit etc. We are talking of insurance contracts purchased by businesses to insure against potential losses. Public liability, employee liability, product liability are all examples of this. If you are in this market then be aware of the findings of TR 14/9 – We have produced a regulatory update R00011/14 on this which provides guidance and analysis- it is available on BOL. Notes below re the above: FCA Thematic Review Findings Published Inherent conflicts within insurance intermediaries are not being properly managed, a review by the FCA has found. After looking at seven of the largest intermediaries who serve small business clients, the FCA has concluded that in some firms, control frameworks and management information have not developed at the same pace as business models. Research into the understanding of small business customers also demonstrated that few understood that there was a possibility for their insurance intermediary to be conflicted. Clive Adamson, director of supervision at the FCA, said: "Small businesses are experts in their particular field but are often not experienced in buying insurance. That is why they need to be able to trust their insurance intermediary to act in their best interests. If there are conflicts of interest that are not identified or properly managed, that trust is put at risk." Insurance intermediaries can play a number of roles in the distribution chain, sometimes acting as agent for the insurer as well as the customer. These different obligations and the way intermediaries are remunerated create the potential for conflicts of interest that need to be actively managed. The FCA focused its review on small business customers as they have more complex insurance needs than retail clients but are not always more sophisticated buyers of insurance. As a result, small businesses often rely on insurance intermediaries for advice. The FCA wanted to establish how the flow of revenue from insurers or other sources to intermediaries could affect how customers were treated. It found that:  there was increased risk of conflicting interests where firms fulfilled multiple roles in the distribution chain and acted as agent for both the customer and insurer in the same transaction;  the control framework and management information in some firms had not developed in line with changes in the size and complexity of the business;  some intermediaries relied on disclosure as the main way to address conflicts of interest rather than having effective control frameworks in place;  disclosure provided to customers was sometimes very generic and unlikely to meet their information needs or enhance their understanding; and  conflicts of interest were not always effectively mitigated in relation to add-on insurance or services, premium finance or where the cost of insurance is borne by a third party. The FCA is concerned that if conflicts are not properly managed there is the risk that decisions are made in the interest of firms rather than their small business customers. This could result in some small businesses over-paying or buying products they do not need. Implications & recommended actions:  This Thematic Review will be relevant to firms that undertake commercial insurance. While the FCA's review focused on larger firms, all intermediaries should take note of the findings and ensure any conflicts are appropriately managed. Sesame Bankhall Group Ltd. Commercially confidential

Suitability and Status
Independent and Restricted Advice

Regulatory Matters Agenda Status
Definition: Independent and Restricted advice FCA thematic reviews Disclosure of status and adviser charging CPD requirements and PII issues Suitability Independent and Restricted suitability considerations Panels and Platforms Centralised Investment Propositions Complex Products Product wrapper investing Risk and suitability assessments Introduction: During the first section of the presentation we will be looking at the status requirements for independence and restricted advice, reminding ourselves of the definitions of both. We will take a look at thematic review TR14/6, the FCA’s concerns, and what you are required to do to meet disclosure requirements. We will also look at the FCA’s new disclosure document assessment tool. ….. We will also consider, CPD and SPS requirements of both types of advice and PII issues. For the second section we will look at Independent & Restricted suitability considerations, panels & platform, CIPS, complex products, a brief look at product wrapper investing and finally risk and suitability assessments.

Status Considerations

Regulatory Matters Independent Advice
Independent advice’ is defined in the FCA handbook (COBS 6.2A.3R) as: ‘A firm must not hold itself out to a retail client as acting independently unless the only personal recommendations in relation to retail investment products it offers to that retail client are: Based on a comprehensive and fair analysis of the relevant market; and Unbiased and unrestricted ‘ Slide Objectives To remind Bankhall firms about the meeting FCA standards for independent advice as well as reconfirming what the firm would need to offer advice in relation to and how they can achieve this. Slide: So let’s start with a recap as to the definition of independent advice. For a firm to offer Independent advice’ the FCA handbook (COBS 6.2A.3R) says: ‘A firm must not hold itself out to a retail client as acting independently unless the only personal recommendations in relation to retail investment products it offers to that retail client are: Based on a comprehensive and fair analysis of the relevant market; and Unbiased and unrestricted ‘ FCA require you to …. Carry out research on WOM to identify solutions – customer best interests Conduct detailed due diligence on the solutions recommended Comprehensive review across the market Consider all investment solutions in market place . The Regulators’ requirements for independent advice are intended to ensure that firms undertake a comprehensive and fair analysis of the relevant market, and that such advice is genuinely unbiased and un-restricted. For advice to be independent there are a number of requirements, as shown in the slide. The FCA has confirmed that by ‘comprehensive’ it means a comprehensive review across the market and not every product in the market has to be reviewed comprehensively. We will touch on Independence and use of relevant markets in a later slide. In providing independent advice a firm must not be restricted by produce or provider and should be able to consider all types of retail investment products that are able to meet the investment needs and objectives of a client. The FCA expects firms to consider all investment solutions available in the market place, they do not require you to carry out detailed due diligence on every product and / or provider. The FCA requires firms to carry out research on the whole of the market to identify a solution that is in the clients best interests, then, conduct detailed due diligence on the recommended solutions. If you confirm to your customers you are independent but fail to deliver an independent service – there is a clear risk of customers being misled or suffering financial loss. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters Restricted Advice
‘Restricted advice’ is defined as: a personal recommendation to a retail client in relation to a retail investment product which is not independent advice; or basic advice A firm can be ‘restricted’ if it is tied to a specific product provider or providers, or if it limits the scope of advice they provide. A typical Bankhall firm offering restricted advice services will either be: Offering products from a single or limited number of companies; Offering basic advice on stakeholder products; Offering limited types of products; or Offering limited types of products from a single company or from a limited number of companies. Slide Objectives To inform Bankhall clients of the definition of and examples of restricted advice models. The slide: Restricted advice on the other hand, is defined in the FCA Handbook as ‘a personal recommendation that is not independent advice’. The ‘Restricted’ definition is a blanket term for any type of advice that is not independent, and includes a wide range of different advice models. These range from a firm who does not consider ‘non core’ investments (i.e. NMPI, VCT, EIS), to firm’s who only advise on a single product from a single provider- what we used to call ‘single tie’. A typical model for small advisory firms is that where the firm will only consider pension/life bond and Unit trusts/Oeics. Basic advice is a type of advice that has long been mooted by the FCA as a potential solution to the advice gap, but as detailed FCA guidance has to date not being forthcoming then most firms tend to shy away from it. However, our understanding is that the FCA are soon to release a consultation paper on basic advice, which may facilitate more firms moving into this area. Note to self: ‘Basic advice’ could be a hot topic by the time we present this. FCA might be bringing out a consultation paper on it week commencing 9th June 2014 so it could be something we need to comment on. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters FCA Thematic Review – RDR
Key RDR objective – to increase transparency for consumers on the services offered by advisers and the charges for these services. FCA conducting a three stage thematic review into RDR implementation FCA warning of regulatory action if no improvement Stage three commences mid July- due to report Q1 2015 Impacts upon both restricted and independent firms Slide objectives To inform Bankhall clients of the FCA’s ongoing thematic review into the RDR, results from the first stages and that the third and final stage commences July 2014 and will report Q1 of next year. The slide FCA conducting a three stage thematic review into RDR implementation First and second stage reviews highlighted disclosure concerns 73% of firms failed to disclose charges clearly at second stage FCA warning of regulatory action if no improvement Stage three commences mid July- due to report Q1 2015 Impacts upon both restricted and independent firms Since inception of the RDR in January 2013 the FCA has been monitoring implementation. It first reported on stage 1 of the review in July 2013 – how firms are implementing the RDR, and two parts of the second stage – independence and disclosure requirements were reported in March and April of As previously mentioned, the tone of the regulator has become more and more stringent, and they are expressing their concerns in very robust language, warning of supervisory or even enforcement action if things fail to improve. Indeed, they have said that ‘it is likely’ that they will refer two firms to the enforcement and financial crime divisions. These firms are a wealth manager and a financial advisory firm. The third and final stage of the review is to commence in July 2014, and the FCA have given Q as a publication date. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters FCA Thematic Review – TR 14/06
‘We found that a high proportion of firms are failing to correctly disclose to clients the cost of their advice, the type of service they offer (i.e. independent or restricted), and the nature of the ongoing service they provide.’ ‘In our view, the level of non-compliance we identified and the failure of firms to meet their regulatory requirements is unacceptable.’ Slide objectives To inform Bankhall clients of the FCA’s thematic review into disclosure requirements and independence, and their concerns as a result. The slide: In March of this year FCA published their findings on independence in thematic review TR14/5 and hot on its heels in April thematic review TR14/6- their report on the way firms are complying with the RDR disclosure requirements. Bankhall has covered off the independence findings previously, but we will recap as part of this presentation. The FCA are still very concerned about the way firms are disclosing their status and the cost of advice. This is something the regulator is getting more and more vocal about, and we understand from what the regulator has said that one of the focuses of the forthcoming third stage of the RDR thematic review will be in this area. They have warned that they will take further action – supervisory and/or enforcement if they find that firms are still not adhering to the rules. The FCA continues to surprise the industry with its plain speaking. In the past the regulator saying straight out that they deem conduct as unacceptable would have been unheard of. However, let’s now look in more detail at the regulator's findings of the way firms are disclosing to their clients……. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters Disclosure Issues
FCA has highlighted disclosure issues in the following areas: Adviser / Firm Status Generic charging structures Client specific charges Ongoing Services Slide objectives: To inform Bankhall clients on the specific areas of concerns the regulator has raised on disclosure issues. The slide: FCA has highlighted the following focus areas: Status Disclosure (e.g. whether providing restricted or independent advice and the general cost) Generic Charging Structure - firm’s standard charging structure Client specific disclosure - the cost of advice for their particular circumstances. Ongoing services – clarity over what ongoing services are being provided and how much they cost, if applicable. The FCA said in their report that they found a high proportion of firms are failing to correctly disclosure to their clients, and highlighted the four key areas above they are to focus on. 73% of the firms the FCA looked at failed to provide the required generic information or how they charge for advice, and/or failed to clearly confirm he specific cost of advice to individual clients in a timely manner. 42% of firms failed to give their clients clear upfront generic information on how much advice might cost, and only half the firms clearly explained how much advice would cost on a individual basis. Notes: FCA surveyed 113 firms of different sizes. They said that the failings ‘appear to be widespread across the industry’, but wealth managers and private banks performed ‘even more poorly’ in nearly all respects. Notes: It has been reported in the press that certain private banks are undertaking internal reviews of past business, centring on suitability. Coutts private bank is one example. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters 1. Status Disclosure Independent advice:
‘We will advise and make a recommendation for you after we have assessed your needs. Our recommendation will be based on a comprehensive and fair analysis of the market.’ Restricted advice - limited number of companies: ‘We will advise and make a recommendation for you after we have assessed your needs. We only offer products from a limited number of companies. You may ask us for a list of the companies whose products we offer’. Independent advice - use of relevant market: ‘We will advise and make a recommendation for you after we have assessed your needs. We only consider ethical and socially responsible investments’ Slide Objectives To show Bankhall clients of examples of disclosure wording for both independent and restricted advice. The Slide: The slide has a couple of different examples of disclosure wording for both independent & restricted advice. The first is for a typical IFA firm which offers independent advice. The wording is designed to inform the client that the firm will look at the full range of retail investment products across the market, in an unbiased manner. The second is an example of a restricted firm. ‘Restricted’ can of course come in many forms, however this example is for a firm which is restricted to a limited number of companies. The third and final definition is for a specialist firm that has defined its relevant market as ethical investments. This disclosure is meant to make it clear to a client that although the firm is independent, it will only look at certain relevant markets, in this case SRI. When a firm is using a relevant market which does not include all RIPS, the disclosure must include an explanation of that market, including all RIPS that make up that market. We and the FCA expect most general independent advisory firms to not use a relevant market. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters Restricted Disclosure
Firms providing restricted advice services must disclose the nature of their restriction, in writing to a retail client prior to providing such services. Disclosures made to a client should not mislead them as to the level of service being offered If a firm is offering restricted advice services, this needs to be made clear i.e. the word ‘restricted’ must be used in the disclosure, both written and orally. Flexibility to allow firms to describe exactly how their service is restricted because the restricted services of different firms may differ considerably; for example: One firm may offer advice on one or two products from a particular product provider Another firm may advise on all but a few high risk products. Slide Objectives To inform Bankhall clients about the flexibility allowable for restricted advice, and to discuss detail of disclosure requirements. The slide: The rules around disclosure for restricted firms are designed to ensure that a client is made fully aware at the outset of the scope of services the firm can provide. The term ‘restricted’ must be used in disclosure documents. As there are many different types of restricted models, then there is some flexibility allowed and firms have some leeway in describing the services they offer. One thing to note here is that if the advice is done via spoken interaction (i.e. face to face) then oral disclosure must be given in addition to written. Firms should consider making a record of when oral disclosure was provided to a client and retain on the relevant client file i.e. a file note or confirmation within the relevant suitability report. The FCA acknowledges that this is a difficult area for them to monitor i.e. ensuring firms orally disclosure that they are offering restricted advice services and the nature of the restriction. The regulator has indicated that it will be looking to conduct some mystery shopping to monitor the extent to which these rules are being complied with. An example of an oral disclosure to be used in this way is as follows: ‘I am a Jones Ltd financial adviser offering restricted advice, which means that my advice is restricted to advice on products from a limited number of companies that Jones Ltd has selected’. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters 2. Generic Charging Structure
Disclose in writing, in good time before making the personal recommendation Need to clearly show when charges will start to accrue Percentage based - clear monetary examples Initial and ongoing advice charges Hourly rates Typically disclosed via an IDD or SCDD Slide objectives To inform Bankhall clients of the FCA’s requirements for generic charging structures. The slide: Firms must disclose their generic charging structure and status to a retail client in writing, in good time before making the personal recommendation Typically at start of first meeting (or prior to) to allow client to make an informed decision in good time Need to clearly show when charges will start to accrue If using a percentage based structure, provide clear monetary examples Applicable to initial and ongoing advice charges If hourly rates used are they actual or indicative If indicative, give indication when they may vary Ensure client can visualise overall cost – estimate hours etc Typically disclosed via an IDD or SCDD A firm must provide clients with generic information at outset, via a disclosure document, so that the client can have a clear understanding of how the firm charges and the likely cost of advice. This needs to be done at an early stage- usually at the first meeting. The idea behind this is that a client should be able to compare the cost structures of different advisory firms, and be able to ‘shop around’. As with much of the RDR rules, transparency is at the heart of the rules. In the thematic review the regulator found that 58% of firms failed to give clients clear upfront generic information about how much the service might cost. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters 3. Client Specific Disclosure
Firms are required to agree and disclose the total adviser charge as early as practicable, in a durable medium in total when payable over a period. Good time to disclose is at end of first meeting but must be prior to execution of transaction Problematic if disclosed after chargeable work has commenced Firms must disclose the total adviser charge in cash terms both for the initial and, if applicable, the ongoing services Exception for transfers with fluctuating amounts – best estimate and then confirm in suitability letter Slide Objectives To inform Bankhall clients of the rules around client specific disclosure rules. The slide: The rules around adviser charging dictate that firms have to let a client know the specific charge they will be paying, and this needs to fulfil the requirements as described in the slide above. FCA say that 50% of firms surveyed failed to give clients clear confirmation of the specific fees they would be charged. The idea behind this is that the client can fully understand exactly what costs they will be liable to pay, BEFORE they are committed to paying them. If the firm operates on a contingency charging basis (i.e. no adviser charge payable unless recommendation is taken up), and the recommendation meeting occurs shortly after the fact find meeting, then it is acceptable to do the specific disclosure at this point. However, the rule in COBS does say ‘as early as practicable.’ Disclosure of total adviser charges payable COBS 6.1A.24 31/12/2012 FCA (1) A firm must agree with and disclose to a retail client the total adviser charge payable to it or any of its associates by a retail client. (2) A disclosure under (1) must: (a) be in cash terms (or convert non-cash terms into illustrative cash equivalents); (b) be as early as practicable; (c) be in a durable medium or through a website (if it does not constitute a durable medium) if the website conditions are satisfied; and (d) if there are payments over a period of time, include the amount and frequency of each payment due, the period over which the adviser charge is payable and the implications for the retail client if the retail investment product is cancelled before the adviser charge is paid and, if there is no ongoing service, the sum total of all payments. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters 3. Client Specific Disclosure
An open-ended percentage charge for initial advice on a regular contribution investment is not acceptable under COBS 6.1A.22R Example: charging 3% on all contributions for a regular premium pension or ISA An ongoing charge must either be to pay off an agreed initial charge or be for ongoing advice Avoid the temptation to ‘disguise’ as an admin charge For ongoing adviser charges based upon percentages of funds under management, clarify that amounts may fluctuate Service and Payment Agreement (SAPA) available to assist in recording and agreeing client specific charges Slide Objectives To inform Bankhall clients of the rules around client specific disclosure rules. The slide: Under the adviser charging rules, an initial charge can only be paid as a single payment (either directly from the customer, or facilitation via a platform or provider) or via a regular premium contribution. However, it cannot be open ended, and should cease when the initial charge agreed at outset has been paid off. Calling this charge an ‘admin’ charge or similar could be viewed as trying to get around the adviser charging rules. If it walks like a duck, quakes like a duck…… An example here would be where the cost for of the initial advice on a regular premium pension was £1000. The customer pays £100 per month out of their regular contribution for ten months to pay the debt down, and the £100 payment to the adviser then ceases as the debt is settled. The FCA initially mentioned this in Factsheet 007, but have reiterated this in the accompanying notes for their new disclosure assessment tool (more on this later). The Bankhall service and payment agreement, SAPA for short is a good document to use to inform the client of the specific charge, in a durable medium, and is also a form of fee agreement. For ongoing charges where the structure is a percentage of the fund value, the disclosure should inform that the fee can go up or down with changes in the fund value. Notes: The rule around ongoing charges: COBS 6.1A.22A 31/12/2012 To comply with the rule on providing a retail client with the right to cancel an ongoing service for the provision of personal recommendations or related services without penalty (COBS 6.1A.22R (1)(b)) a firm should: (1) ensure that any notice period of the retail client's right of cancellation is reasonable; (2) not make any charge in respect of cancellation of the ongoing service except for an amount which is in proportion to the extent of the service already provided by the firm up to the date of cancellation of the ongoing service; and (3) not make cancellation conditional on, for example, requiring the retail client to sell any retail investment products to which the ongoing service relates Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters 4. Disclosure of ongoing services
Clear representation of ongoing services and cost – informed decision What to expect and when Explanation of terminology ‘Annual Review’ – when, how, by whom, who will arrange? Valuation – when and what medium? Clients right to cancel Maintain records to evidence delivery of ongoing services Slide objectives: To discuss the rules around disclosure of ongoing services and costs The slide: The FCA reported that 34% of firms they surveyed failed to give a clear explanation of the ongoing service they offer for an ongoing fee, and/or the clients right to cancel the service at any time. As one of the key aspects of RDR was to improve transparency for consumers then the regulator has concerns about this. The FCA wants clients to be fully aware of what the ongoing fees will be, how and when they will be paid, what the client can expect for the fees in the way of service, and that they can cancel the fee at any time. The language used needs to be jargon free and be something that a normal retail client could understand. The key issues found were that failure to disclose what services a client would receive for the ongoing fee, failure to disclosure the client’s right to cancel & the mechanism by which this would be achieved, and finally firms not having robust procedures for ensuring that the ongoing services agreed were delivered. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters FCA’s disclosure document assessment tool
June 3rd FCA launched disclosure documents assessment tool Available as a PDF or Excel spreadsheet. Slide Objectives To discuss the new tool and to assess its importance. The slide: Off the back of their finding in TR 14/6 the FCA has launched an assessment tool to help firms review whether their disclosure documents are complying with the post RDR disclosure rules. What we are going to do is to open up the tool and answer the questions. We will assume that the firm we are assessing are independent, and that they have a couple of different charging options. OPEN TOOL AND DISCUSS. Notes to self: Do the live demonstration, and then discuss the responses. Discuss the issue of open ended ongoing charges, and the FCA’s clear guidance on this area. Launch the tool and show it in use. Show the supporting notes and demonstrate one question where it flags up as red. Example: Question 2a asks: ‘Does your provide the client with details of the specific charge?’ If we answered ‘no’ to supplementary question 2a) iii, this will flag up as red. The guidance notes supplied by the FCA contain a reference to the tool question, the reasons & explanation for the rule, and a reference to the COBS rule. COBS 6.1A.24 (1) A firm must agree with and disclose to a retail client the total adviser charge payable to it or any of its associates by a retail client. (2) A disclosure under (1) must: (a) be in cash terms (or convert non-cash terms into illustrative cash equivalents); (b) be as early as practicable; (c) be in a durable medium or through a website (if it does not constitute a durable medium) if the website conditions are satisfied; and (d) if there are payments over a period of time, include the amount and frequency of each payment due, the period over which the adviser charge is payable and the implications for the retail client if the retail investment product is cancelled before the adviser charge is paid and, if there is no ongoing service, the sum total of all payments. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters FCA expectations of tool usage
FCA’s disclosure document assessment tool FCA expectations of tool usage ‘This template is not compulsory but we would encourage all firms that are subject to the RDR requirements to complete the template and save a copy for their records’. ‘We plan to use this to assess disclosure in the third cycle of our review’ Slide objective: To inform Bankhall clients about the regulator's expectations for the new disclosure assessment tool. The Slide: The FCA has said that it is ‘not compulsory’ to use the tool. However, given that the FCA has expressed concerns about the way firms are disclosing both their status and their charging structures then we would recommend that firms use the template, that they answer the questions accurately, and if required amend proposition and/or disclosure documents to ensure compliance with the FCA rules around adviser charging. Indeed, this is what FCA recommend that firms do, and that a copy is kept on file. You need to have all green boxes when all the questions in the tool are completed. The FCA plans to use the tool themselves in the third cycle of their RDR review. Once the template has been completed, we would expect firms to take action to remedy any issues highlighted.’ ‘Use of the template alone does not constitute compliance with all the disclosure requirements.’ ‘We plan to use this to assessment disclosure tool in the third cycle of our review’ Sesame Bankhall Group Ltd. Commercially confidential

PII Regulatory Matters Other matters - CPD and PII
‘…..a firm must ensure that a retail investment adviser who has been assessed as competent….remains competent by competing a minimum of 35 hours of appropriate continuing professional development in each 12 month period’ (TC R) ‘A firm must effect and maintain at all times adequate professional indemnity insurance cover for all the business activities which it carries on, or for which it is responsible.’ (IPRU(INV)) PII Slide Objectives: To inform Bankhall clients that the rules around CPD, SPS are the same regardless of status. To discuss the requirements for PII cover in the new post RDR world. The slide: So, let’s quickly look at a couple of other issues. Any investment adviser, of whatever status they are need to adhere to the post RDR CPD requirements. These are that an adviser is required to do at least 35 hours of appropriate CPD in each 12 month period, and of that 21 hours needs to be structured. Structured CPD is an activity that uses material or activities that are designed to achieve a particular learning outcome. As with unstructured CPD, it has to be capable of being independently verified. Some examples of Structured learning activities include: participating in seminars (web based or in person); lectures; conferences; workshops etc. The activity should require a contribution of thirty minutes or more of the adviser’s time. It does not include carrying out research in the course of advising a client. The word ‘appropriate’ in the rule above is interesting, as there is no further guidance on what might be appropriate, primarily because what might be appropriate for one adviser would not necessarily be for another. Independent advisers need to ensure they conduct CPD into all the Retail investment products (‘RIPs’), whereas Restricted advisers only need to look at growing and maintaining their knowledge in the areas of advice they are able to conduct. CPD The rules are the same for all retail investment advisers are the same, regardless of status: ‘…..a firm must ensure that a retail investment adviser who has been assessed as competent….remains competent by competing a minimum of 35 hours of appropriate continuing professional development in each 12 month period’ TC R Let’s move on to PII issues. As quote from the FCA Handbook says, a firm must have ‘adequate’ PII insurance cover. For restricted advice models which tend to exclude riskier products then PII implications around getting adequate insurance should not be an issue. If a firm advises on pensions, life bonds and unit trusts then securing PII cover should be relatively easy. However, what of independent firms? An independent firm is required to be able to advise on all retail investment products, which of course includes riskier products such as UCIS and other non mainstream pooled investments. However, with the PII market seemingly hardening- looking to charge much higher premiums, or indeed to exclude certain products then this could be a real issue. There is no easy solution if a firm cannot secure PII cover for all its activities, but there is the option to hold additional capital if a particular product is advised on, and still remain within the rules on PII. For example, a firm holding itself out as independent could have an exclusion for UCIS on its PII cover, as it could say that in the eventuality of advising a client on a UCIS it would thereafter hold additional capital in line with its turnover. As the firm could well have no suitable clients for UCIS, then this should not be an issue. Professional indemnity insurance: ‘A firm must effect and maintain at all times adequate professional indemnity insurance cover for all the business activities which it carries on, or for which it is responsible.’ IPRU(INV) Sesame Bankhall Group Ltd. Commercially confidential

Suitability Considerations
Slide Objective Intro Slide – scene setter Slide Content As the changes introduced by RDR become an ever more distant memory, it’s becoming clearer by the day that the more impactful regulation over recent times was in fact the increased focus on suitability. RDR was clear – you either met the requirements or you ceased to exist. The issue of suitability cuts to the heart of an organisation, and impacts their culture, proposition and interaction with customers. Over the last few weeks we have seen a number of different documents issued by the FCA, all of which support this view. The snappily titled ‘Supervising Retail Investment Advice: Delivering Independent Advice’ (TR14/05), provided guidance for, and reaffirms the framework for delivering independent advice. This has been followed up by the annual Risk Outlook paper and supporting Business Plan. The ongoing theme of suitability runs through all these papers, with a number of areas for focus during the year ahead. And if anyone needs any reminding of the consequences of not addressing the requirements that have been in place for a number of years, a number of recent fines (£12.5m fine to Santander and £400,000 to 1 Stop) for poor investment advice should spell out how seriously the FCA view this subject. What we are aiming to do today is look at some of the key issues noted by FCA over recent months with a look back at some past issues that they have highlighted. Suitability Considerations

Retail Investment Products
Regulatory Matters Suitability In order to be independent, all personal recommendations to retail clients (in relation to retail investment products) must be: Based on a comprehensive and fair analysis of the relevant market; and Unbiased and unrestricted Firms must consider all products that fall within the Retail Investment Product definition. Some non RIP products must also be considered for general suitability (whether independent or restricted) Retail Investment Products Non Retail Investment Products Independence Slide Objective A quick recap on the fact that suitability is the overriding factor, whether independent or restricted. The slide RDR brought about an increase in the types of investments that independent advisers must be in a position to consider in order to meet the independence requirements. Significantly, in the post-RDR world, independent advisers must be able to consider some high risk and niche products such as Unregulated Collective Investment Schemes (UCIS) and other non-mainstream investments – collectively known as NMPI. In additional, there are some general non RIP products, such as deposits or National Savings, that should also be considered in all cases. Although these do not impact upon independent status, not including them in any solution would almost certainly compromise the suitability of any recommendation. So suitability is the overriding factor, whether independent or restricted. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters Independent
Restricted advice – Suitability Considerations Independent All retail investment products considered Wide range of solutions Complex options Recommendation must be suitable Restricted Can be by product or provider Must be clearly disclosed Fewer Options Recommendation must still be suitable Refer if no suitable solution available Slide Objectives To highlight the difference between independent and restricted and illustrate that a restricted proposition may have a narrower product range and not always have a suitable solution for the client. The slide As we discussed earlier, there are many different ‘restricted propositions’ out there and whilst restricted advisers will not be subject to the same requirements to consider all retail investment products as independent advisers are, they will still need to consider the suitability of any investment products that they are able to recommend. Independent firms will have access to additional products which have been added to the RIP list post RDR that may not be advised upon by a specific restricted proposition, such as VCT as either there is nobody at the firm with expertise or the firm do not want to take the risk with those products. If that is the most suitable solution for a client, a restricted adviser must refer rather than shoe-horn someone into a less suitable option. There is an overarching need to act in the client’s best interests whenever the suitable product or solution is not within their range. So, for example, they should refer the client to another adviser who can advise on the out of range product/service where appropriate. E.G If a firm is restricted because they do not advise on drawdown contracts and that is the most suitable option for a client, it should be referred away to someone who can rather than a different, less than suitable option be recommended. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters Panels Platforms Some firms have introduced panels
Panels and Platforms Panels Some firms have introduced panels Can be independent if whole market origin and regularly reviewed Adviser must be able to go ‘off panel’ for suitability purposes Clearly documented process required Platforms Many firms utilise platforms Part of overall solution If independent must be able to go off platform for suitability If restricted to platform, must refer if no suitable option Clearly documented process required Slide Objectives To highlight to firms the use of panels and platforms , and confirm that there are important suitability considerations in each case The slide There has been an increase in the number of platforms and panels being used post RDR and although there is no issue with that, consideration must always be given to the individual client objectives and whether the available solution is actually suitable. Panels As we discussed last month, it is quite straight forward for firms to set up a panel, either on a restricted or independent basis – that is determined by the starting point. To be independent, the initial panel research should be based upon a fair and comprehensive analysis of the relevant market with no bias towards product or provider. Last time around we demonstrated the Bankhall ‘Product selection tool which allowed firms to demonstrate that they had considered all retail investment products at firm level, excluding certain retail investment products that were not suitable for any of their current clients. For example, excluding UCIS on the basis that no existing clients meet with the various financial promotion exemption criteria. This would be classed as an independent panel. However, the reasons for this exclusion cannot be applied indefinitely and firms will need to review this selection regularly e.g. every 6/12 months. This is because existing clients’ needs may change, the firm may take on new clients with different needs, existing products may change or new products may become available. When considering suitability, it is quite possible that you could come across a client who requires a product or fund that is not included within the independent panel. It is important to have a clearly documented process to show how an adviser can go ‘off panel’ to satisfy this otherwise you will struggle to demonstrate independence. It is also a good idea to have your risk based monitoring programme highlight ‘off panel’ as being a higher risk and prioritised for file review. Restricted advisers can still go off their dedicated panel but if there is no solution in range then they must refer on. Platforms The situation with platforms is quite similar. If you determine your customers needs and research a suitable product / solution and it is available on a platform then that should be fine – the platform is part of an overall solution. The issue arises when the research is restricted to what is available on a platform. This will automatically compromise your independence and could also compromise suitability if there is a more suitable option available elsewhere. Again, if you are restricted in this way and have no other available solution, you should strongly consider the suitability of your options prior to making the recommendation. Although the FCA has said that a single platform approach may be acceptable, this is only likely to work where a firm has a homogenous client base i.e. the firm has chosen to build its proposition upon a set of clients with similar circumstance and needs. In most firms this is not the case; most firms will have clients with differing requirements, and therefore are likely to need different solutions. There is an overriding consideration of cost when dealing with platforms. The FCA have stated that they would not expect all clients to require the features of a platform, particularly if there is a cost involved. Individual consideration should be given as to what benefit a client will get from being on a platform and whether this is in their best interests if there is a cost involved. If there is a cost involved and the platform option is more expensive than going direct, we would expect to see this clearly illustrated within any suitability letter with a discussion surrounding the benefits that the additional charge brings. It is likely that the FCA would consider any additional cost for no real benefit as an unsuitable customer outcome. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters Centralised Investment Propositions
Can be beneficial to both clients and firms Must ensure that solution is suitable for individual clients Not a ‘one size fits all’ Sufficient initial due diligence and ongoing reviews Firm still responsible for advice given using third party solutions Key considerations: Is cost of solution in clients best interest and clearly presented? If improved performance is driver, why is new investment likely to outperform existing? Is this documented? Is advice suitable given tax implications and client specific objectives? Can you evidence that advisers are competent in CIP use? Do you assess relevant management information in respect of CIP? Slide Objectives To highlight to firms the use of CIPs post RDR and to highlight the key considerations which should be made when constructing, reviewing and using a CIP. The slide The industry has seen a large increase in CIPs in the run to and post RDR. FCA recognise there can be benefits to offering a CIP for both clients and firms. Clients can benefit from more structured and better researched investments and firms can benefit from efficiencies in the management of risks associated with investment selection. FCA do have concerns that, in certain circumstances, a CIP may be unsuitable for a retail investor. For example: ‘Shoe-horning’ – firms might recommend a ‘one size fits all’ solution which is not suitable for the individual needs and objectives of a client; Churning – firms might advise clients to switch their existing investments into a CIP without adequate consideration of whether the switch is both suitable and in the client’s best interest; and Additional costs – the use of a CIP might result in higher (and potentially less transparent) Consideration needs to be given to overall suitability. Furthermore, although a firm may have a third party CIP solution, the firm remains responsible for its use and should conduct suitable due diligence prior to introducing. Consideration needs to be given to whether: firm’s CIP is designed to meet the needs and objectives of its target clients; • firm’s sales process is designed to ensure that a CIP is only recommended to clients when it is suitable for those clients; • firm’s advisers are competent to assess whether or not a CIP is suitable; • CIP is promoted and recommended to clients in a way that is fair, clear and not misleading; and • firm has adequate oversight arrangements and management information (MI) to mitigate the risk of unsuitable advice. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters Centralised Investment Propositions Good Practice:
Client segmentation and identification of typical client needs Formulate list of needs prior to researching third party solutions Strong due diligence on provider Adviser training on identifying when a CIP is not suitable Specific fund range (non CIP) for clients not wanting ongoing advice Use of MI to allow board to monitor adviser use of CIP – RAG Poor Practice: No evidence of initial due diligence prior to selecting CIP Asset allocation model but no ongoing reviews offered No assessment of client tax position (CGT) when recommending switch to CIP Inheritance of CIP through merger but no further due diligence One CIP and no option for advisers to research ‘off CIP’ solutions Incentive scheme rewarded CIP use more than non CIP Slide Objectives To highlight good and poor practice points as stated by FCA – in FG 12-16: Assessing suitability: Replacement business and centralised investment propositions The slide Starts with good points then reveals poor – should be self explanatory Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters Independent advice: Main additions to product range post RDR Post RDR ‘Retail Investment Products’ > ‘packaged products’ Increased ‘product range’ for independent advisers Main additions to product range Exchange traded funds Investment backed Structured Products Unregulated Collective Investment Schemes VCT and EIS Strong suitability concerns with some products ‘Consider’ not ‘recommend’ Slide Objectives To highlight to firms the additional products which have been added to the RIP list and confirm that there are important suitability considerations in each case The slide As we mentioned earlier, the Retail Distribution Review has led to an increase in the types of investments that independent advisers must be in a position to consider – some of these are, by their nature, high risk and niche products such as unregulated collective investment schemes (UCIS). Much of the focus on high risk investments in recent years has been in respect of UCIS, but more recently the FCA has sought to define a wider range of products that present similar risks for ‘ordinary retail investors’, with the intention of introducing more stringent controls on how these are sold. It is important to note that the regulator expects these to be considered and not recommended. Not recommending a UCIS will not impact upon your independence. Overriding factor is the suitability for the customer. Sesame Bankhall Group Ltd. Commercially confidential

UCIS Regulatory Matters Qualified investor schemes Traded Life Policy
Complex Products – Non Mainstream Pooled Investments Some Special Purpose Vehicles Qualified investor schemes Traded Life Policy UCIS Pooled investments or ‘funds’ Unusual, speculative or complex assets, structures or strategies. Cannot promote to ‘ordinary retail investors’ Consider for clients who meet sophisticated / high net worth definition Classed as ‘Specialist’ investments Slide Objectives To highlight to firms the additional products which have been added to the RIP list and confirm that there are important suitability considerations in each case The slide Pooled investments or ‘funds’ Unusual, speculative or complex assets, structures or strategies. UCIS Traded Life Policy Investments Qualified investor schemes (QIS) Some Special Purpose Vehicles (depending on structure) Cannot promote to ‘ordinary retail investors’ Consider for clients who meet sophisticated / high net worth definition Classed as ‘Specialist’ investments Non mainstream pooled investments (NMPIs) – These are pooled investments or ‘funds’ characterised by unusual, speculative or complex assets, product structures, investment strategies and/or terms and features. These are products that can only be promoted to retail clients who are not ‘ordinary retail investors’ from January 1st 2014 onwards. The four products that will fall into this category are;-  UCIS;  Traded Life Policy Investments (TLPIs);  Qualified investor schemes (QIS) and  Some Special Purpose Vehicles depending on how they are structured. SPVs will not be classed as NMPIs if they invest primarily in shares and/or bonds but will be classed as NMPIs if they take the form of a collective investment scheme The FCA considers that NMPI products should never be sold to ordinary retail investors (in most circumstances). There are also certain other products that the FCA considers not to be ‘mainstream’. Bankhall have broken all RIP products down into three categories to assist firms in understanding how the FCA views the suitability of such products for ordinary retail investors. We consider them to be either Core, Non Core or Specialist – discuss the product selection tool at this point, which was demonstrated last round. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters Customer Types Sophisticated Investors - retail clients with extensive investment experience and knowledge of complex instruments, who are better able to understand and evaluate the risks and potential rewards of unusual, complex and/or illiquid investments such as NMPIs. High Net Worth Customers - retail clients meeting the criteria for categorisation as high net worth individuals. Among the criteria for being classed as a high net worth individual, is having an annual income of more than £100,000 or having investable net assets of more than £250,000. Both must meet exemptions under the Promotion of Collective Investment Schemes (PCIS) Order, the Financial Promotions Order (FPO) or the FCA rules. Clients certify that they meet criteria – due diligence by adviser Slide Objectives To highlight to firms the typical profile of high net worth and sophisticated customers as there are important suitability considerations in each case The slide The FCA has introduced the term ‘ordinary retail investor’ to cover the rules for selling NMPI products. Whilst this will not be a defined term in the rules, the FCA has used it to make clear that this type of retail investor is not suited to NMPI products. The following text is a paraphrased version of the FCA’s retail client definition that appears in that policy statement. A retail investor is a person who invests in their capacity as a retail client – that is, a client who is neither a professional client nor an eligible counterparty. Professional clients and eligible counterparties are defined in COBS 3 and, generally speaking, are institutional clients and individuals who invest “by way of business” i.e. investing is part of their occupation The FCA rules regarding the sales of NMPI distinguishes between three types of retail customer: Following consultation on these proposals, the FCA has issued PS13/3. PS13/3 sets out the new rules in relation to the promotion of UCIS and close substitutes, which come into effect on 1 January 2014. Within PS13/3, investments captured by this ‘ban’ are collectively referred to as ‘non-mainstream pooled investments’ (NMPIs). PS13/3 affects : Firms promoting products, now classified as NMPIs, to retail customers; Product providers offering these products or which allow access to them through investment wrappers; Discretionary portfolio managers, who may include NMPIs in portfolios; Providers that create these investments; and Compliance consultants and other firms that assist distributors. These new rules do not affect the marketing of NMPIs to sophisticated / high-net worth investors. 1. Sophisticated investor(s) These are retail clients meeting the criteria for categorisation as sophisticated investors under any of the sophisticated investor exemptions in the Promotion of Collective Investment Schemes (PCIS) Order, the Financial Promotions Order (FPO) or in the FCA rules. These are retail clients with extensive investment experience and knowledge of complex instruments, who are better able to understand and evaluate the risks and potential rewards of unusual, complex and/or illiquid investments such as NMPIs. 2. High net worth individual(s) These are retail clients meeting the criteria for categorisation as high net worth individuals under any of the high net worth investor exemptions in the PCIS Order, the FPO or in the FCA rules. Among the criteria for being classed as a high net worth individual, is having an annual income of more than £100,000 or having investable net assets of more than £250,000. These criteria are subject to review and may be updated in future. 3. Ordinary retail investor(s) This is the term the FCA uses to refer to retail clients who are neither sophisticated investors nor high net worth individuals. These are the investors of ordinary means and experience who make up the vast majority of the retail market in the UK. As discussed in a 2012 consultation paper by the International Organization of Securities Commissions (IOSCO), such investors face difficulty understanding the terms and features of complex financial products. Such investors are at particular risk in relation to inappropriate promotion of NMPI products. Confirm that firms should have a strong process that includes signed client declarations to confirm that they understand risks and that they are indeed sophisticated or high net worth – responsibility will however remain with the firm! Sesame Bankhall Group Ltd. Commercially confidential

Direct share investment
Regulatory Matters Complex Products – ‘Non Core’ Not classed as NMPI by FCA but not considered ‘mainstream’ ‘Unlikely’ to be suitable for ordinary retail clients Share NMPI characteristics - complexity and risk. Suitable only for retail clients who understand the complexity and risk. Individual risk appetite must be consistent with that of product ‘Guide to assessing suitability of non-core and specialist investments’ EIS Film Partnership Direct share investment VCT Slide Objectives There are some products that share the level of risk and complexity but are not subject to the marketing ban for ordinary retail clients. These products are only likely to be suitable for retail clients that understand the complexity and risk profile of such products and whose risk appetite and individual circumstances may warrant consideration of such products. Firms may wish to treat the sale of such products according to enhanced sales standards, elements of which may be those applicable to NMPI sales. Typically, these clients will have significant investment experience and knowledge, strong resources and capacity for loss and a suitably high attitude to risk. It is also beneficial for the investor to have a knowledge in the underlying investment. Please refer to 'Guide to assessing suitability of non-core and specialist investments' for more details and specific sales process considerations. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters Product wrappers such as SIPP or Platform
Investing via a product wrapper Product wrappers such as SIPP or Platform Regard as a ‘direct’ investment for suitability reasons Still subject to the NMPI marketing restrictions. FCA concerns in this area published July 2103 Further alert issued July 2014 Slide Objectives To highlight to firms the additional products which have been added to the RIP list and confirm that there are important suitability considerations in each case The slide Points to cover: Regard as a ‘direct’ investment for suitability reasons Subject to the NMPI marketing restrictions. FCA concerns in this area published July 2103 Additional supervisory work undertaken Pension switches / transfers to SIPPs Further alert issued July 2014 FCA have been quite vocal about this in recent months and have made it clear that you cannot limit your advice and responsibility. The initial alert from the regulator outlined the FCA’s view that where advice is given on a product (such as a SIPP) which is intended as a wrapper or vehicle for investment in other products, such as a UCIS, provision of suitable advice requires consideration of the overall transaction, that is, the vehicle or wrapper and the expected underlying investments (whether or not such investments are regulated products). Despite the initial alert, some firms continued to operate a model where they purportedly restrict their advice to the merits of the SIPP wrapper. The FCA thinks that advising on the suitability of a pension transfer or switch cannot be reasonably done without considering both the customer’s existing pension arrangement and the underlying investments intended to be held within the SIPP. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters FCA Findings:
Investing via a product wrapper – FCA findings FCA Findings: Advice being restricted to the wrapper and not investment as a whole Customer not experienced in non-mainstream propositions Many having very limited experience of standard investments Typically unregulated, high risk and highly illiquid investments. Unlikely to be suitable for the vast majority of retail customers. Poor standards of advice, research and due diligence Slide Objectives Discusses the issues with limiting advice to wrappers The slide Where a financial adviser recommends a SIPP knowing that the customer will transfer or switch from a current pension arrangement to release funds to invest through a SIPP, then the suitability of the underlying investment must form part of the advice given to the customer. If the underlying investment is not suitable for the customer, then the overall advice is not suitable. If a firm does not fully understand the underlying investment proposition intended to be held within a SIPP, then it should not offer advice on the pension transfer or switch at all, as it will not be able to assess suitability of the transaction as a whole. The failings outlined in this alert are unacceptable to the FCA and amount to conduct that falls well short of firms’ obligations under the FCA’s Principles for Businesses and Conduct of Business rules. In particular, the FCA reminds firms that they must conduct their business with integrity (Principle 1), due skill, care and diligence (Principle 2) and must pay due regard to the interests of their customers and treat them fairly (Principle 6). Cannot just call limited advice and include a risk warning! Generally speaking, the FCA found very poor standards of advice. Firms typically failed to carry out an adequate assessment of the customer’s overall financial position, needs, attitude to risk and objectives in relation to the switch or transfer as a whole (including the characteristics and risk of the wrapper and of the underlying investments). Advisers’ understanding of non-mainstream propositions was also typically very poor, at least in part because of inadequate due diligence on the products and on the product provider. Example: FCA Action – May 2014: 1Stop Financial Services (1 Stop). Switching to SIPPs to access unregulated and high risk investments. No advice regarding underlying investments given, SIPP focus only. Partners banned from regulated activities. Fine of £490,100. Company now ceased trading, cancelled permissions Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters Independent advice: Main additions to product range The FCA reminds firms that they must conduct their business with : integrity (Principle 1), due skill, care and diligence (Principle 2) and must pay due regard to the interests of their customers and treat them fairly (Principle 6). Other conduct failings identified by the FCA Business models where all customers were treated as ‘insistent’ or seeking execution-only services. Number of firms adapting business model to advise customers to take out Small Self-Administered Schemes in an attempt to avoid FCA scrutiny. Advice to switch or transfer from pension arrangements is a regulated activity regardless of the funds’ destination! Slide Objectives To highlight to firms some of the practices that the regulator has found that they consider not to be in the spirit of the Principles The slide Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters Assessing the risk a customer is willing to take
Key issues Over reliance on risk profiling tools Poor / inconsistent descriptions of attitude to risk Failing to select suitable investments Inappropriate focus on risk only Responsibility when using tools Slide Objectives To discuss the fact that although risk profiling tools are useful, they are not the definitive solution, more a starting point for a discussion The slide The Conduct of Business sourcebook (COBS) 9.2.1R requires a firm to take reasonable steps to ensure that a personal recommendation, or decision to trade, is suitable for its customer. COBS requires firms, among other things, to take account of a customer’s preferences regarding risk taking, their risk profile and ensure they are able financially to bear any related investment risks consistent with their investment objectives. Over the years numerous ‘risk profiling tools’ have sprung up and often they are a good starting point for assessing the risk that a client can afford to take. Tools can usefully aid discussions with customers, by helping to provide structure and promote consistency. But they often have limitations which mean there are circumstances in which they may produce flawed results. Where firms rely on tools they need to ensure they are actively mitigating any limitations through the suitability assessment and ‘know your customer’ process. FSA (as the regulator was called at the time) issued guidance on this area back in March 2011, FG Establishing the risk the customer is willing and able to take, and making a suitable investment selection’. They said that ‘’ We reviewed 11 risk-profiling tools and were concerned to find that nine tools had weaknesses which could, in certain circumstances, lead to flawed outputs.’’ Now personally I disagree, I think that ALL OF THEM if used incorrectly could lead to flawed outcomes. The regulator says that: ‘Where firms rely on tools they need to ensure they are actively mitigating any limitations through the suitability assessment and ‘know your customer’ process.’ We often see files which show attitude to risk as a number (1-10) or a single word such as ‘balanced’ or ‘low’ – these should be accompanied by a suitable description which is understandable to the client. The risk profile is not a stand alone measure – you need to consider some other factors such as capacity for loss, client experience and knowledge, the actual goal and whether the level of risk indicated actually needs to be taken. The responsibility for using the tool is yours – prior to selecting one you should be able to evidence the due diligence that led to your decision. Above all, the process must be clear with the questionnaire, risk definition and actual recommendation all being consistent. Highlight issue of using different tools and definitions and lack of consistency: E.G Using Skandia tool to get a 7 / 10 reading and then recommending Standard Life’s 7/10 risk rated fund that would actually be a 9/10 on the Skandia scale. Where firms rely on tools they need to ensure they are actively mitigating any limitations through the suitability assessment and ‘know your customer’ process. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters Suitability assessment and ‘know your customer’
Risk profiler is good starting / discussion point Bankhall IRP tool includes suitability questions Further risk based KYC Carry information through to the suitability report Slide Objectives To highlight to firms the key questions to consider when determining attitude to risk. Highlight the Bankhall IRP at this point which has suitability questions built in – clients can use paper based questions if they use a different risk profiling tool. The slide What knowledge does your client have of investments and the risks they carry? Where relevant, please provide detail to demonstrate their depth and breadth of technical knowledge across the full range of investments. If they have not actually invested themselves, please confirm how their knowledge was gained. Which types of funds and investments does your client currently hold or have they held in the past? Where relevant, please provide a summary of the types of products / funds that they have used, the frequency and volume of investments, the approximate dates and the purpose e.g. retirement planning and any investment outcomes i.e. gains / losses of capital. How reliant is your client on the money they are investing for their wider financial security? What other funds do they have to meet their needs, if any? Would they experience a significant reduction in their standard of living, either now or in the future, if they suffered a capital loss? What would be the impact on their standard of living if their funds didn't achieve the required return? Could they easily replace lost capital? Do they have other funds to fall back on? In the event that your client needed access to a lump sum of money, how likely is it that they would need to encash their invested funds? How confident are you that your client will be able to leave their invested funds untouched for the anticipated investment term? Do they have access to sufficient alternative funds that they could call on first? Further points to raise: Bankhall IRP tool includes these questions to assist with your suitability assessment Carry this information through to the suitability report Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters Regulatory Publications FCA
Suitability Regulatory Publications FCA ‘Supervising Retail Investment Advice: Delivering Independent Advice’ (TR14/05) Annual Risk Outlook paper and supporting Business Plan (April 2014) FSA ‘Establishing the risk the customer is willing and able to take, and making a suitable investment selection’ (FG11-05 – March 11) ‘Replacement business and centralised investment propositions’ (FG12-16 – July 2012) Bankhall guides also available: /Compliance and Technical / Advisory Guides Slide Objectives: Simple slide to highlight further reading if required from regulator plus location of Bankhall guides to assessing suitability Highlight that every firm should be familiar with the regulatory guides Sesame Bankhall Group Ltd. Commercially confidential

The Regulatory Landscape

Regulatory Matters ‘Regulatory landscape’ FCA ‘Connect’ system
The FCA will be launching its new ‘Connect’ system from 1st October 2014 ONA submissions and applications will change to Connect Approved Persons applications Appointed Representatives Cancellations Standing Data Variation of Permissions FCA stated that it will give firms time to submit any draft applications / notifications that they are working on in ONA until 1 December 2014. Slide Objective To inform firms of upcoming changes or FCA activity. FCA replace ONA with Connect Note: All that is occurring is that the older ONA system is to be replaced in October with the new Connect system. The new system will be used for exactly the same submissions as the old. FCA will issue more information on this later in the year, advisers don’t need to do anything at this point. From 1 October 2014, the FCA will be launching its new ‘Connect’ system. Approved Persons, Appointed Representatives, Cancellations, Standing Data and Variation of Permissions applications and notifications that are currently submitted on the FCA’s ONA will need to be submitted via Connect. Any new applications or notifications that firms create from 1 October 2014 will need to be submitted via Connect. However, the FCA stated that it will give firms time to submit any draft applications/notifications that they are working on in ONA until 1 December 2014. The FCA indicated that over the coming months, it will release further details and emphasised that firms do not need to do anything now or take any action. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters FCA’s Retirement Income Review
‘Regulatory landscape’ FCA’s Retirement Income Review February the FCA announced probe into retirement income market 80% of consumers could secure greater income by shopping around Budget changes – wider review to look into value for money of retirement income products in the existing and new market landscape. Reported that FCA review of annuity sales practices now a standalone thematic review, on which it will report by the end of the year Mainly at provider level but could be wider implications Slide Objective To inform firms of upcoming changes or FCA activity. Review of Retirement Income New Model Adviser has reported that the FCA has shifted the focus of its review into the retirement income market following the changes made to pensions announced by the government in the 2014 Budget. It is reported that the FCA’s review of sales practices of annuities will now be a standalone thematic review, on which it will report by the end of the year. In February of this year, the FCA announced it was set to probe competition in the retirement income market after its review into the annuity market found that 80% of consumers could secure a more generous retirement income by shopping around. The following month, measures to dramatically increase flexibility of pensions at retirement, cutting the 55% tax charge for people accessing their entire pension at retirement from 2015 was announced in the Budget. Due to the Budget changes, the FCA has revised the terms of reference of its retirement income review to include a study into the new market landscape and will look into value for money of retirement income products in the existing and new market landscape. It will also look at how consumers, providers and intermediaries are likely to behave in the new market landscape. It was reported that the FCA said: ‘While the overarching objective of the market study remains to assess whether there are obstacles to competition working more effectively for consumers, in light of the Budget announcement we have revised its scope to give it a more forward looking focus. This will allow us to understand developments in the new landscape and identify any competition risks and potential consumer detriment.’ The FCA will also be using this study to help its work in developing the guidance guarantee. ‘In our market study we will identify whether there are issues to address in the final version of the guidance guarantee as well as whether there are wider consumer protection issues that the FCA should also address.’ The FCA is inviting comments from the industry before 18 July. The FCA also stated that it had originally planned to issue its interim findings from the market study in the summer, but will now publish this later this year. Sesame Bankhall Group Ltd. Commercially confidential

Regulatory Matters Business Risk Awareness Workshops
‘Regulatory landscape Business Risk Awareness Workshops FCA – continuing BRAW workshops and assessments CF, LD, LL, NP, SA, SY, GL, HR, CH, CW postcodes being assessed now BRAW Specific support available Onsite visit or remote appointment facility Other FCA thematic reviews MMR post implementation review and testing - Autumn 2014 FCA post RDR thematic review, 3rd Stage – mid July Slide Objective To inform firms of upcoming changes or FCA activity. FCA BRAW visits The FCA is hosting a further round of BRAW workshops between during July 2014 and onwards. We recognise that all regulated firms should be familiar with the main requirements of this Business Risk Awareness programme; specifically risk and the three cornerstones of Governance, Control and Culture; therefore the requirements of BRAW in general should not be a new concept. However, this level of contact with the regulator can be quite daunting for a small firm and recognising this, Bankhall has put together a dedicated BRAW support facility. These services are designed to provide our clients with focus, direction and peace of mind in the run up to BRAW and the following regulatory review, noting that we have already seen workshop rounds which have followed up with online and telephone questionnaires. As previously mentioned, further work is also expected around the Mortgage Market Review to ensure that lenders and intermediaries have successfully implemented this. We believe that this is going to be in Autumn 2014. As noted earlier in our presentation, the FCA are to begin their third stage of the post RDR thematic reviews in mid-July. It is therefore imperative that all firms have taken on board all guidance and recommendations to ensure that if they are part of that review, then they meet all regulatory requirements. That’s the end of the round up and I hope you found it useful just before you go could I ask you now to grab your handsets so that we can obtain your feedback about this afternoons events? Sesame Bankhall Group Ltd. Commercially confidential

Questions? Regulatory Matters ‘Hot Topics’ - 2014
Don’t forget… support is available from: Compliance Consultants CSU Regional Development Managers Bankhall Online Questions? Sesame Bankhall Group Ltd. Commercially confidential

Before you leave the event we would like you to use the handset given to you to ask a few questions about this afternoon and our services. Handset questions

Handset Questions How satisfied are you with the information you have received during this afternoon’s event ? Very satisfied satisfied OK Unsatisfied Very unsatisfied Please stress that it is for this afternoon event only! Sesame Bankhall Group Ltd. Commercially confidential

Handset Questions that all regulated firms should be familiar with the main requirements of this Business the three cornerstones of Governance, Control and Culture; therefore the requirements of BRAW in general should not be a new concept. However, this level of contact with the regulator can be quite daunting for a small firm facility. These services are designed to provide our clients with focus, direction and peace of mind in the run up to BRAW and the following regulatory review 2. How likely are you to attend future sessions similar to this afternoon’s event? Very likely Likely Don’t know Unlikely Very unlikely Sesame Bankhall Group Ltd. Commercially confidential

Thank you and questions
Ok – thanks for attending this event today and we hope that you find this useful. We will be completing more Bankhall only events in the near future so keep an eye out for these. (questions – if we have time)))) Thank you and questions

Regulatory Matters July/August Event

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Regulatory Matters July/August Event

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