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Lessons from the lang cat: what should planners take away from recent regulation?

07 Mar 2017

The recent regulatory output from the FCA has been quite prolific. the lang cat took the time during the recent 7IM roadshow to explain to attendees what they as planners should look out for and concentrate on.

Regulation is for the majority of us a dull part of our world, but one that should probably be treated as a byword for good practice that enables us to continue and thrive as an industry.

Lately the FCA output has also been quite prolific. Planners and providers are therefore currently being asked to study the Financial Advice Market Review (FAMR) and plan for the second phase of the Markets in Financial Instruments Directive (MiFID II). You should also understand the implications of the FCA’s Asset Management Market Study for your business, although it is primarily aimed at investment product providers.

Stepping onto the stage were two members of the lang cat’s team – well known for their blunt approach to explaining the regulatory research. Mark Polson and Mike Barrett were there to walk roadshow attendees through the latest litany of guidance and recommendations that you as financial planners should focus on.

The FCA’s in depth update on the advice industry post RDR
First on the list to cover off à la lang cat was FAMR: 80 pages of text that yielded 28 recommendations. 21 of these counsels should see further consultation according to the report, although many do not have a timeline set against them.

More useful, according to the team, was a factsheet to help employers talk to their employees about the quality of the pension scheme they’re providing. Also helpful – albeit still a work-in-progress – was the proposed support (even at an individual firm basis) via the FCA’s advice unit that will determine the best approach to online guidance versus other forms of advice, and will outline the evaluation needed to ensure it is fit for purpose.
There is also a campaign planned to assist you as to how best you can set out fees and charges when communicating these to clients and ensure that they’re readily understood.

There is also a campaign planned to assist you as to how best you can set out fees and charges when communicating these to clients and ensure that they’re readily understood
. Meanwhile, there’s more of a move by the Financial Ombudsmen Service (FOS) to adopt a risk based approach along the same lines as the capital approach for SIPPs, i.e. one that requires firms to hold more capital as insurance if they invest in more complex assets than standard, vanilla ones.

What was not included was a long-stop, i.e. a limit to the time that you can be liable for the advice given to clients. While there are some limits baked into the FOS complaints process, Scotland’s 20 year cap is not likely to be adopted across the country.

However, there may be wiggle room for some sort of a time limit in future. the lang cat’s team spends quite a lot of time in front of the regulator and stated that they do recognise the impact this has on insurance bills and consequently the costs of doing business that are inevitably passed on to your clients.

Wanting to take action on this? The lang cat’s recommendation is that you encourage your professional body to keep on lobbying. And if the planning sector could come together under one umbrella, the lang cat reckoned that by coalescing, you stand more chance of getting your (collective) views clearly heard.

The final outcome from the FAMR report was the launch of a pensions’ dashboard. With circa 16 providers signed up, this should make the task of chasing down old pension pots to provide that single client view easier. A planned rollout is coming soon…so watch this space!

The day of the MiFIDs
The next report covered off by Barrett and Polson was MiFID II. With consultation on the FCA draft closed, we now await the full report (due mid 2017) for implementation by 1 January 2018. But there are some parts of the report that you should start to prepare for now.

Some had hoped that since the regulation stemmed from the EU, we would almost certainly have triggered Article 50 by its introduction. However, given the framework will be in place before we actually leave the EU, it is unlikely to be revoked.
Some good news can be derived from the fact that a huge proportion of MiFID II is aimed at product providers, and so can largely be skimmed through by planners.


Some good news can be derived from the fact that a huge proportion of MiFID II is aimed at product providers, and so can largely be skimmed through by planners.
Details elsewhere around disclosure are worth noting, and the lang cat highlighted three key areas.

Firstly, there will need to be a detailed breakdown of the costs and charges levied across the whole value chain ultimately paid by your client. These can’t be bundled and, expressed in Pounds and Pence, will need to cover:

  • Any up-front /exit charges by a provider, as well as the ongoing charges figure (OCF)
  • Any platform or discretionary service fees

  • Custody charges

  • What you’re charging for advice and planning

The FCA has baulked to date at becoming a price regulator, but this could be the start of a change in mind set out of Canary Wharf. The Leith-based firm had some advice here too.

Up to 2%, you should have no problems convincing everyone that you were delivering fair value. Between 2% and 2.25%, the team recommended additional due diligence and vetting to ensure that the rationale for the total charge was justified. Anything over that 2.25% was probably too difficult a justification.

Of course, this will then mean work on your end ensuring value for money versus absolute charges, and could mean that a renegotiation on fees may be on the cards with some of your partners.

Another area for preparation was the quarterly distribution of transactions and valuations from custodians and product providers for the previous quarter. It was seen that most clients already do not find these necessary on a six monthly basis, but the transparency resulting from these was still deemed necessary.

Another communication that will join the club after January’s adoption is triggered if the value of the portfolio, or an individual investment, falls by 10% in the reporting period. If the market falls a further 10% then a second communique will be needed. Who provides the letter – you or the product provider – is still to be determined. No letter is needed if a portfolio goes up by 10%, naturally.

For all those hoping that an online system would suffice, meanwhile, you will need to provide proof that the client has seen, read and understood any ‘dematerialised’ literature. Easier said than done, although some hope may lie in any existing systems that already allow your client to give permission for any regular rebalancing of portfolios.

Given that any planning practice is likely to have a book of relatively inactive clients, potential contact issues should also probably be planned for with this group now.
Perhaps surprisingly, one of the biggest impacts on adviser firms will be in the world of telephony. Calls between you and your clients will need to be recorded and stored for five years.


Perhaps surprisingly, one of the biggest impacts on adviser firms will be in the world of telephony. Calls between you and your clients will need to be recorded and stored for five years
. The same is true of landline and mobile phone calls. This is relatively easily done if you have a voice-over-internet-protocol (VoIP) phone system versus good old BT copper wiring – note this is unfortunately not the same as Skype! Your phone company may charge as little as £1 per line per month for this, and a bit more for storing the call recordings. The more difficult conversation will probably be around mobile usage. Many personal contracts do not offer the option to record calls, meaning that you may have to switch to slightly more expensive business contracts, or put in place third-party solutions.

Text messages also need to be kept as do all ‘electronic’ communications. However, recordings of face-to-face meetings are not needed – not least since you and your client can eyeball each other and since you probably already take some notes in any case.

Last, but not least, on the MiFID II immediate to-do list, is to look into the classifications for complex products. Some products may need you to undertake additional due diligence either to ensure that the client meets any additional hurdles required to remain invested if they are re-categorised as ‘complex’ or because the product providers make changes to the investments in question to ensure they don’t become viewed as ‘complex’ – either way it means you have to update your suitability report for each client involved.

What’s next from the FCA for asset managers?
The last report covered off the latest views from the FCA regarding asset managers. And the picture wasn’t always flattering.

And while much is mainly relevant for those product providers, the following highlights are worth you digesting:

  • 51% of investors don’t know they pay fund charges. This group includes advised clients so you may need to make sure your clients are among the 49% who don’t think you’re operating a charity and, increasingly important, who can actually cite what those fees and charges are.
  • £6bn is invested in expensive trackers. As per the earlier point about the FCA avoiding a role as a price regulator, it is these types of investments that are likely to encourage the FCA to step up action here. The example provided by the lang cat is a well known brand offering a tracker fund with a 1% fee. Given trackers are on offer in the market for 0.07%, there is obviously a big disconnect between the fees paid and the costs involved in managing the investments. The £26mn earned by this £2.6bn fund on an annual basis could therefore be about to come to an abrupt end.

  • A further £109bn is invested in ‘closet’ trackers. The FCA’s decision to identify this group may also underline a potential shift to price regulation in its mind. Active managers who deliver little or no outperformance versus the benchmark because of their high level of index replication and low ‘active’ share selection may mean these managers come under pressure.

  • Economies of scale are captured by fund managers, and not passed on. A £1bn fund doesn’t often cut its fees when it gets to £10bn, for example. With the lang cat noting an exception in 7IM and Vanguard, it’s possible we may see more action from the regulator

And the lang cat’s final salvo? With the regulation on inducements only set to get stricter still, there may only be the option for you as planners to accept the gift of peppermint-favoured induce-mints from the lang cat going forward. Get them while you can! 

Attendees at the event – and readers of this article – are also in line for a further freebie courtesy of 7IM and the lang cat. Visit www.langcatfinancial.co.uk/7IMtour, start to check out as if you were paying for the report and instead enter the discount code ‘7IMTOURCAT’. The price will reset to zero for you to download and enjoy the report.

the lang cat was set up in Leith six years ago by Mark Polson and is an agency that provides insights into financial regulation for the investment industry, as well as marketing communications support for financial services clients. 12 people now work there and more information is available at: http://www.langcatfinancial.co.uk.

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The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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