Investment Forum Regulatory Update Round 1 - 2019

Learning Objectives Understand the key concerns from the FCA’s Assessing Suitability Reviews Understand what Product Intervention and Governance (PROD) means to you Identify the key changes EU legislation will have on UK regulation

2018 What a year!

2018 – What a year! MiFID II IDD GDPR PROD Pension Transfers SM&CR 2

MiFID II The key aim of MiFID II was to strengthen protection for all clients This gave us new rules and requirements

Who is most excited about MiFID II?

MiFID II – SimplyBiz Support

MiFID II Suitability Disclosure

Suitability All investments have to be reviewed annually? Clients can no longer have biennial reviews? This will change the way we carry out reviews! ACTION POINTS: Review your service proposition Ensure you have a robust investment review process Always issue a suitability report following an investment review

We have not provided ex-post disclosure, are we in breach? ACTION POINTS: Understand the approach your platforms & providers have for disclosure of aggregated charges Think how you will include any direct payments for your servicing charges in the aggregated costs Remember the 10% rule; discretionary portfolio management – reporting required – check your agreement with the discretionary manager   Investment services and/or ancillary services – cost of advice, platform costs, discretionary fund management cost, etc. £X,XXX X.XX % Financial instrument/The Product – the investment/scheme Total costs and charges. We have not provided ex-post disclosure, are we in breach? Our service charge is paid directly by the client so how do we disclose this? Some of our client portfolios have dropped by more than 10%. What do we do?

PROD

Firstly, we have produced a guide, available on the website – Operating Centre, Business Hub, Plans & Templates

No Yes What is PROD about Determining suitability of individual investment / product that will be targeted to (potential) clients of the firm No Understanding customers they deal with and target, having knowledge of the different types of investments / products that may be appropriate for them Yes

Product Objectives PROD applies to: Manufacturers Distributors It’s purpose is to

The Manufacturer When designing products they must: Identify the target market and ‘negative’ market Identify the risks, characteristics and objectives of the investment Identify the intended distribution strategy

For the adviser PROD is about Understanding the customers they deal with or target Having knowledge of the different types of investments or products that may be appropriate for them Demonstrating an understanding of the investments and products they distribute and the nature of their risks

So what does that mean? Is PROD a centralised investment proposition? Is PROD your client segmentation process? Is PROD is a high level look at the investments you think may be right for your clients?

NON-ADVISED DFM ADVISED RETAIL RISK PROD for Advisers Understand the manufacturer's assessment Who are the (target) clients? Risks, commitments, objectives of the product i.e. complexity Distribution strategy RETAIL PROFESSIONAL MARKET COUNTERPARTY

OF PROD Post Sales Review view products and their distribution method After assessments have been made to the different types of investments/products and the distribution strategy of these, firms must review these on a regular basis to ensure there are no changes to the characteristics of the investment/product that could result in it becoming unsuitable. In addition, a review to the way in which these are distributed should confirm it continues to meet the needs of the firm’s (targeted) clients. This is particularly relevant where the investment/product changes due to innovation and is highlighted in the following rules:

Post Sales for Manufacturers Investment houses and product providers may seek information from firms but should only do this on an investment-by-investment basis or product-by-product basis i.e. it will not be on individual funds or the different types of life assurance offerings.

What will this look like Types of clients you distribute it to Distribution method An overview of any complaints about the investment General feedback from clients

SimplyBiz Support Compliance Plan Client Classification Research and due diligence Investment committee KPI / MI Review Form CPD activity

Support

Assessment of Suitability

Assessing Suitability FCA Thematic review carried out in 2016 656 firms contacted, 1,142 files reviewed The purpose of the review was to assess: How firms disclose their services Quality of the advice

Disclosure: Overall results in 2016 In 53% of cases the firm provided acceptable disclosure In 47% of cases, the firm provided unacceptable or uncertain disclosure

Quality of advice What it told us then 93% of cases were found to be suitable 7% of cases were either unclear or unsuitable

FCA Annual Report and Accounts ‘In 2019 we intend to re-assess the suitability of advice and conduct a further review’ ‘Based upon advice delivered in 2018 we will measure how the results have changed since the 2016 review’ This will also allow the FCA to assess how firms have implemented the requirements introduced by MiFID II, PRIIPs and the IDD

Common issues from the 2016 review

Assessing Suitability Disclosure - Common Issues: Use of ranges on fee charges – no specific cost No cash examples quoted Applying a charge to all regular contributions for the initial cost of advice Hourly rate with no indication of how long it will take Tiered charging with incorrect or no examples

Assessing Suitability Disclosure – Tiered charging structures Always give cash examples for each of the tiers Up to £100,000 – 3% Up to £300,000 – 2% Over £300,000 – 1%  What is the charge to invest £350,000?  

Assessing Suitability Suitability – Common issues: Generally a lack of soft facts about the client and in some instances no factfind on file Suitability Reports being too long Not personalised / use of generic text and jargon

SimplyBiz file review team 4395 files reviewed in 2018 – 2151 files graded suitable – 43% 2710 files graded unclear – 55% 75 files graded unsuitable – 2%

SimplyBiz file review team Suitability – Common issues: Pension switching cases – fact find states that the client wants to review their pension but no reason is stated Drawdown – clients taking TFC but without stating the justification or need for this Attitude to risk inconsistent with capacity for loss

Factual Case Study Client at SRA retiring with a pension fund of circa £250K He holds a few small investments but nothing significant Married no dependents but spouse has reduced state pension but little to no private provision TFC to be used for car, home improvements, etc. Needed around £22K pa income to maintain lifestyle

Invested into drawdown in a risk rated 5 fund withdrawing <5%pa The outcome of advice Client stated he “did not want to purchase an annuity” Money from pension would be used to cover essential outgoings His ATR was 5 (on a scale up to 10) He was a transactional client Invested into drawdown in a risk rated 5 fund withdrawing <5%pa

The assessment of suitability Grade: Unsuitable Why didn’t the client want an annuity? Health? Risk assessed but not capacity for loss Sustainability of the fund not considered No cashflow forecasting was on file What was his investment experience? What happens in the event of his death and his wife is left with the drawdown plan Could they have qualified for state benefits?

SimplyBiz Support We have a team qualified and experienced in-house and field compliance managers Focused topics include: Client file reviews Client service reviews Centralised Investment Propositions Individual agreed agendas

Learning Outcomes Understand the key concerns from the FCA’s Assessing Suitability Reviews Understand what Product Intervention and Governance (PROD) means to you Identify the key changes EU legislation will have on UK regulation