Round Up Spring 2019

from threesixty

spring 2019

Welcome to the third edition of Round Up. Spring is here! When we made the decision to revamp Round Up and produce a quarterly publication, we did wonder whether we would struggle to fill it. Unlike other publications of this type, we’re not allowing people to buy space, advertise or place articles. Instead we want to only publish content we think will be beneficial for you. As it happens, we need not have worried. A steady flow of regulatory and technical changes have made it hard to narrow down content. We’ve tried our best to include everything we think you really need to be aware of. The features section highlights new guidance and comments from within threesixty. Whilst the inclusion of guest articles allows us to invite third parties, with specialist knowledge, to talk about subjects that we’ve identified as important, and in need of a further expert view. In this edition, MorganAsh tackles a dilemma for many - ‘how much money do you need to save, and how long does it need to last ?’ We don’t know when our clients will die. ONS data can tell us averages, but are your clients average ? EIS’s continues to be a high risk area and only appropriate in a limited number of situations. Being aware of these is important so that suitable advice can be provided. Intelligent Partnership prompt us to ask five key questions when selecting an EIS.

Unlike previous editions, this edition doesn’t contain a PI feature. But, PI renewals are still one of the big challenges facing firms. In helping manage your expectations of any upcoming renewal, we thought we would flag that some insurers are adding what would be best described as a product levy. This was something suggested as part of the FSCS funding review, but was rejected as legislation change would be required to allow FSCS to be pre funded. Something that the government didn’t have the capacity nor desire to pursue. Nevertheless, some PII policies are incorporating specific premiums for each DB transfer case. Please do talk to us as you approach your PI renewal. It’s very important to position yourselves correctly, both with your broker, but also in how they position you with underwriters. I write this as I travel to a meeting with underwriters, to position threesixty clients as a good insurable risk for them. threesixty clients have, and invest in, a good culture and governance controls with long term futures. In my meeting with the FCA cancellations team in January, firms with DB exposure struggling to get cover was highlighted as the second biggest reason for firm cancellations, only second to consumer credit firms that became regulated for the first time recently, before realising that regulation was not for them! We hope you find this edition of Round Up useful. Let us know if you have any suggestions on what should be included in future editions, and if you wish to discuss any of the topics within, please don’t hesitate to contact us. Russell Facer, Managing director

Contents Quick catch up... Regulatory matters Technical matters Guest articles Managing longevity in draw down Five questions to ask when selecting an Enterprise Investment Scheme Features Getting to grips with product governance Maintaining competence How we can help you meet your CPD requirement ? Services Introducing targeted support Intermediaries and technology Getting the most from our core services Key contacts Why use threesixty research

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12 14

16

18 20

22 24 26 27 27

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Quick catch up... With so much happening within the marketplace, it’s sometimes difficult to see the wood for the trees. Use this section as a quick refresher, or catch up. Naturally, if you have any queries, please don’t hesitate to contact us.

Falls in financial markets cause client portfolios to lose value

Recent falls in financial markets have led to some client portfolios losing value. Those that have fallen by over 10% trigger the MiFID II requirement to notify investors of the losses sustained. Usually the responsibility to report sits with the fund manager, however this responsibility can be passed on to platforms or advisory firms in certain cases. What you should do If you’re an advisory firm with no investment management permissions, you’re not required to report portfolio losses, unless you’ve entered into an arrangement to do so. For example, if a firm uses a discretionary fund manager (DFM), on an acting as agent basis, and the contract between the firm and the DFM passes this responsibility on to the advisory firm. In these circumstances, the ‘end of business day’ deadline* applies.

If no such agreement is in place, we recommend that the advisory firm passes the information to its end client as soon as is practically possible. If you’re a discretionary management firm, the responsibility for reporting lies with you, unless you’ve contractually passed this requirement onto an advisory firm or platform. A firm providing a discretionary management service is required to inform a client where the overall value of their portfolio (as evaluated at the beginning of each reporting period) depreciates by 10%, and further multiples of 10%. *This must be done no later than the end of the business day in which the threshold is exceeded, or in a case where the threshold is exceeded on a non-business day, the close of the next business day.

New! Senior managers and certification regime zone Our new SM&CR zone contains detailed guidance on how to prepare for the regime including: • The actions you need to take to implement the new conduct rules with your team. • How to appropriately allocate responsibilities to senior managers, and • How to correctly certify relevant staff. Specific project plans, relevant to your firm (limited scope, core and enhanced regime) are also available, together with a range of downloadable guides, template documents, training videos and remote learning modules.

2

regulatory matters

Do you understand agent as client arrangements?

Does your client understand the agent as client rules when it comes to model portfolio services ? Do you ? The development of model portfolio services has continued apace over the years and many firms now use them to manage investment risk for their business, and provide consistent solutions to their clients. They have become a profitable way for discretionary fund managers to expand their businesses and offer their services to those with smaller sums to invest. The bulk of these offerings operate on the agent as client basis. Meaning that the DFM only has a relationship with the intermediary, not the end client. This arrangement is legitimate and permissible, but there are a number of regulatory risks to be aware of. The clarity of the relationship chain is vital. It will only work if all parties clearly understand their different roles and responsibilities, and if these are appropriately documented. In most cases, the intermediary firm will hold only advisory permissions, so it’s just the DFM that can manage investments. Doing anything that constitutes managing investments by discretion would amount to the intermediary acting outside of their scope. The DFM will manage the portfolio, rebalancing New! Completing your GABRIEL return zone

or making changes as and when they see fit. It’s common for the DFM not to know how many individuals are investing in their portfolios. This is not important. They merely engage with the advisers and permit them to invest their client’s funds into their offerings. As for the client, they need to know who the discretionary manager is, but that they don’t have a relationship with them. They need to understand the arrangement, its implications, and be shown it’s suitable for their needs. The adviser should explain the full rationale behind the agent as client position in the suitability letter which recommends the DFM’s model portfolio service. Additionally, if a firm offers the agent of client model, the adviser’s client is unlikely to have access to the FOS in the event they wish or need to complain about the DFM’s provision of services. This should be clearly explained. Our work with firms suggests some are still not fully understanding the agent as client relationship. What’s of more concern is that it’s often not adequately explained or documented with the client. If your firm provides a discretionary management service, we recommend that you review your approach to documenting this advice, to ensure agreements, recommendations and the associated implications are fully explained and understood by all involved.

Our new GABRIEL zone contains all the guidance you need to complete your regulatory return. Access it via the homepage and select your firm type from the menu (Article 3 exempt non-MiFID, authorised professional, BIPRU, or exempt CAD). Video guidance is also available to assist with the trickiest sections. Need our help when completing your return? If required you can set threesixty up as a ‘view only’ user on GABRIEL. This allows us to log into GABRIEL, to assist you with any queries relating to your return. For more information see the threesixty website, alternatively contact our compliance helpdesk who will be pleased to assist.

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Does your accountant understand FCA requirements?

they’ve been given, whilst tax-efficient, has inadvertently caused FCA capital adequacy or reporting breaches. Contracting with an accountancy firm who are familiar with FCA regulation, either on an occasional basis (for example, when advising on a new business venture), or on a regular basis (for example, for GABRIEL completion), can help in a number of ways. An accountant without expert knowledge of FCA requirements is not in a position to give you appropriate advice.

It’s vital that your accountancy firm understands the FCA’s balance sheet requirements that apply to your firm. When appointing, or replacing your accountant, do you ask them whether they deal with other FCA authorised firms of your type ? We regularly receive enquiries about the financial aspects of GABRIEL regulatory reporting and business restructures. Some of these enquiries come from firms who have acted in good faith on the advice of their accountant. However, the advice

Clear and fair financial promotions The FCA has issued a ‘Dear CEO’ letter to regulated firms, reminding them of their requirements for fair, clear and unambiguous financial promotions. The FCA issued this letter having identified occasions that imply all of the referred activities (within a promotion) are FCA-regulated, when this isn’t the case. The FCA rarely issue this type of letter on the subject of promotions, so it’s reasonable to conclude that there’s an enhanced level of concern in this area. It’s likely they will be carefully monitoring a variety of promotions for the foreseeable future. Did you know? threesixty review around 3,000 financial promotions each year, including client agreements, business stationary, blogs, flyers, websites and radio / TV advertisements. Our reviews aim to help you publish compliant promotions that meet relevant FCA and Advertising Standards Agency (ASA) requirements. To take advantage of this service, contact our compliance helpdesk. How a suitably experienced accountant can help you ... • They can complete certain GABRIEL sections for you, using your firm’s accounts. • They will understand the negative impact of goodwill on capital adequacy when considering client bank purchases and other business transactions. • They can remind you of the possible need to complete an FCA Change of Control form when shareholdings change. • They will understand when audited accounts are required and could complete these for you. • They will understand the requirement for, and can complete, limited assurance reports and help with ICAAP documents and Pillar 3 disclosure (for DFM/BIPRU firms).

4

regulatory matters

Record keeping requirements The FCA has general record keeping requirements which oblige firms to retain

2. Supporting records You must also retain supporting records in respect of the relevant transaction, such as: • Information noted on the client agreement. • Know your client information. • Suitability reports. • Application forms. • File notes of meetings or telephone discussions. Records which fall under either of the above categories must be retained for: • Ongoing business relationships For five years after the business relationship has come to an end. However, records obtained specifically for anti-money laundering purposes shouldn’t be retained for more than ten years. • Occasional / one-off transactions For five years after the transaction is complete, after which, records obtained specifically for anti-money laundering purposes should be deleted. When considering the 4MLD rules, firms will need to put a system in place to ensure that these can be met. This may mean keeping a record of when the data is collected within your back office system. You should naturally consider these obligations when designing your data retention policies. Also, remember that you should only retain personal data that is necessary to the performance of your contract with the client. We would always recommend that prior to deleting any data, firms should discuss the implications with their PI insurer.

orderly records of the services and transactions they have undertaken to enable the FCA to monitor their activities effectively. There’s also specific requirements for the retention of suitability records which vary, dependent on the type of business conducted. Currently these are: • Five years Generally for investment business and related activities. • Indefinitely For pension transfers, opt outs and free-standing voluntary contribution (FSAVC) schemes, and • Three years For mortgage or insurance business. The 4th Money Laundering Directive, (4MLD), implemented on 26 June 2017, introduced new rule requirements for record keeping. Where these don’t match those of the FCA, we would expect firms to apply the higher standards. 4MLD splits client data into two categories. 1. Client due diligence records You must retain all evidence of your client due diligence records, such as: • Client ID verification documents. • Any other relevant information recorded. • Template documents used to record verification of ID in addition to sources of funds. • Electronic verification check reports. • Client risk ratings for money laundering.

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FCA’s retirement outcomes review Following its retirement outcome review, the FCA has issued two papers, one confirming CP19/5 provides details of a further proposed package of remedies, including:

new rules and guidance, and another proposing a further package of remedies. The FCA’s final report into its Retirement Outcomes Review (ROR) focused on individuals who didn’t take advice, and raised concerns that some of these clients are at risk. The FCA has now confirmed new rules and guidance and proposed a number of further changes. Although these changes, and the new proposals, mainly affect product providers, they will be of interest to any threesixty clients active in the retirement market. PS19/1 confirms the FCA’s new rules and guidance on its first package of remedies from its ROR. These relate to: • ‘Wake-up’ packs (information sent to clients before they decide how to access their pension savings). • Information provided to clients about annuities and eligibility for enhanced annuities. • Changes to make the cost of drawdown products clearer and more comparable.

• The requirement for drawdown providers to offer a range of investment solutions to non- advised consumers, with carefully designed choice options. These will be referred to as ‘investment pathways’. • The requirement for providers to make sure consumers invest in cash, only if they make an active decision to do so. • The requirement for providers to disclose to consumers who are beginning to draw on their pension, how much they’ve actually paid in charges (including transaction costs) over the previous year. These costs will need to be shown in pounds and pence. • An update on the FCA’s suitability guidance to remind advisers of their obligation to consider available pathway solutions when assessing suitability for retail clients, who are making a decision about drawing down funds.

FSCS publishes 2019/20 plan and budget The FSCS has published its plan and budget, setting out its proposed levies for 2019/20. The FSCS also confirms that it will apply supplementary levies to meet unforeseen compensation costs from 2018/19. • The FSCS expects to levy a total of £516 million for 2019/20, and sets out the indicative levies for the FSCS funding classes. The monetary impact of these changes on individual firms will not be entirely clear until the FCA publishes its annual fees and levies consultation in April. We’ll provide a further update at that point. • The FSCS confirms that it needs to raise a supplementary levy to cover the £78 million deficit in the life and pensions intermediation class during 2018/19. This has been allocated to the life and pension intermediation, investment intermediation and general insurance intermediation funding classes. • From 2019/20 the FSCS will collect ‘on account’ levies from firms who already pay their FCA fees on account (firms paying FCA fees in excess of £50,000). The FSCS will collect 50% of the levy (based on the firm’s 2018/19 levy) on account. • More details are available on the threesixty website. See: Regulatory developments / Other / FSCS plan and budget 2019/20.

6

regulatory matters

The SM&CR is to be extended to all FCA authorised firms from 9 December 2019. It will affect all threesixty clients. Most of the detail of the implementation has already been confirmed in previous policy statements and guidance documents issued by the FCA, but a new consultation: CP19/4 - Optimising the SM&CR, proposes minor changes to some of the provisions in the previous policy statements. The issues most likely to affect threesixty clients are: • Clarification as to the scope of the client dealing function in the certification regime, to exclude administrative staff who may be involved in processes to place deals or transmit orders in investments. • A requirement for certain firms who fall within the enhanced regime definition to notify the FCA prior to the implementation of the regime and on an annual basis. The consultation closes on 23 April and a policy statement is expected in the third quarter of 2019. Further details are available on the threesixty website within the Regulatory developments / Consultations section of our website. Senior Managers and Certification Regime - Minor changes proposed The FCA is increasing the current FOS award limit to: • £350K for complaints concerning acts or omissions by firms which take place on or after 1 April 2019. • £160K for complaints concerning acts of omissions by firms which take place before 1 April 2019 and which are referred to the FOS on or after 1 April 2019. It also confirmed: • From 1 April 2019 onwards, both of the above award limits will be automatically adjusted each year in line with inflation, using the Consumer Prices Index for the preceding January. • The award limit of £150K will continue to apply to any complaint referred to the FOS before 1 April 2019. What does this mean for you? Before these new requirements come into force on 1 April 2019, you should: • Update any consumer facing information about complaint handling procedures. • Refer to the most recent version of the ombudsman service’s standard explanatory leaflet. • Ensure your staff are made aware of the increased limits. FCA confirms increase to FOS award limit

7

regulatory matters

The FCA has published the findings of its review on the disclosure of ex-ante costs by retail intermediaries. It undertook this review to: • Assess firms’ level of compliance with the rules. • Identify firms that are failing to comply. • Understand how well firms are sharing cost and charges information with each other to enable them to meet their obligations to provide aggregated figures to clients. • Understand what effect the new rules are having in improving the transparency of firms’ communications with clients. FCA findings Overall the FCA’s review suggests that the industry has been slow to comply with the relevant rules. It’s key points were: • All firms reviewed were aware of their costs and charges disclosure obligations. However, the FCA has concerns with the way that some firms were carrying out these responsibilities. • Firms were not interpreting the relevant rules consistently. However, the FCA highlighted that most of them had given this serious consideration and were trying to comply with them. • Firms who were not complying with the relevant rules cited the problems they faced in obtaining all the required data from third-parties to do so. • Firms are reluctant to upgrade their technology to support information disclosure to clients as they weren’t confident about the accuracy and delivery of this data. • Firms are looking to comply with the new requirements, but there was reasonable evidence to support that their efforts are being hampered by the required data not being available. The regulator is expecting all firms to review their own costs and charges disclosures in light of the review findings to make sure they are satisfying all relevant requirements. FCA publishes its findings on costs and charges disclosure

The FCA has confirmed new rules and guidance requiring firms to write to certain PPI complainants whose complaints have previously been rejected. The FCA has already set a deadline of 29 August 2019 for consumers to complain about the sale of payment protection insurance (PPI) policies. Within PS19/2, the FCA confirms new rules that require firms, who have previously rejected certain PPI complaints, to write to affected complainants informing them that they can make a new complaint about undisclosed commission. Thy must remind them that the deadline for doing so is 29 August 2019. These letters need to be sent no later than 29 April 2019. They must: • Explain that the recipient can make a further complaint, if they want, about non-disclosure of commission (at point of sale or later). • Refer to the deadline of 29 August 2019 for making PPI complaints and to the identity of the lender (where this is known to the seller). • Provide information about the firm’s complaint handling arrangements (where it’s the lender). • Refer to the information about making a further complaint that’s available on the FCA’s PPI website or through the FCA’s PPI contact centre. If you’ve received, and rejected, any PPI complaints in the past, you will need to consider whether you now need to send the complainant a further letter by 29 April 2019. Rejected PPI complaints - further contact needs to be made

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technical matters

Couples who have only one person in work need to ensure that the right one registers for Child Benefit in order to make sure National Insurance (NI) credits are awarded. Normally, a parent or carer of a child under 12 automatically gets Class 3 NI credits if they claim Child Benefit (whether or not they actually choose to receive the Child Benefit payments). However, if the Child Benefit is claimed by the working parent (who will usually already be paying NI), the non-working parent does not receive any NI credits and may therefore lose entitlement to future State Pension. NI credits can be transferred between parents of children under the age of 12 using HMRC form CF411A, but usually only for a single tax year. However, if the time limit has passed, the application form should still be completed giving the reason why the person didn’t apply on time. If the circumstances are reasonable, HMRC can still award the credits, as long as the person meets the transfer conditions. Loss of NI credits for those receiving Child Benefit

Increase of minimum auto enrolment contributions

On 6 April 2019, the minimum amount that will need to be paid into a workplace pension will increase to an overall minimum of 8% of qualifying earnings, with employers contributing at least 3% of this. The Pensions Regulator (TPR) is contacting all employers to remind them of their duties. The TPR website provides further information on the increases. Employers are able to write to their staff using the template provided on the TPR website should they wish. They should also check with their payroll software provider and pension provider to ensure plans are in place ahead of 6 April 2019.

Changes to benefits for mixed age couples The government has announced that it will be introducing changes to benefits for mixed age couples from 15 May 2019. When single people reach State Pension age, they move from working age benefits to pension age benefits. At the moment, couples can choose to make that transition when the older partner of the couple reaches State Pension age. In 2012, Parliament voted to modernise the system and change the rule for couples so that the transition takes place when the younger partner reaches State Pension age. This will ensure the younger partner is in the same circumstances as other people of the same age, regardless of the age of their partner. The government has now announced that the change will be introduced from 15 May 2019. Mixed age couples with a partner under State Pension age already in receipt of Pension Credit, or pension-age Housing Benefit, at the point of change will be unaffected while they remain entitled to either benefit.

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Proposed tax changes in Wales and Scotland Scotland For 2019/20, the Scottish government chose to move the income tax system further away from the rest of the UK by: • Increasing the starter (19%) and basic (20%) rate bands in line with inflation (2.5%), and • Freezing the higher rate threshold. Because of the increases to the first two Scottish tax bands and the rise in the personal allowance of £650 for 2019/20, this means the intermediate (21%) rate band shrinks by £945. The 2019/20 (and 2018/19) tax bands are as follows for income above the Personal Allowance (which is £12,500 in 2019/20).

Taxable income

Band name

Tax rate %

2018/2019

2019/2020

Starter

19

0-2,000

0-2,050

Basic

20

2,001 - 12,150

2,051 - 12,445

Intermediate

21

12,151 - 31,580

12,446 - 30,930

Higher

41

31,581 - 150,000*

30,931 - 150,000*

Top

46

Over 150,000*

Over 150,000*

* Those with more than £100,000 adjusted net income will see their Personal Allowance reduced by £1 for every £2 earned over £100,000. Remember that these tax rates and bands only apply to non-savings and non-dividend income such as earnings and pensions. For dividends and savings income, the rates/bands are the same as in the rest of the UK. Wales From 6 April 2019, the tax rate paid by Welsh taxpayers on non-savings and non-dividend income will be calculated by reducing the basic, higher and additional rates of income tax, levied by the UK government, by 10 pence in the pound and adding new Welsh rates proposed by the Welsh government and set by the National Assembly for Wales. The National Assembly for Wales has agreed to set each of these three rates at 10% for the tax year 2019/20, which means in the new tax year the tax rates and bands for Welsh taxpayers will be the same as in the rest of the UK (excluding Scotland).

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technical matters

Encouraging retirement planning amongst the self employed

The Department for Work and Pensions (DWP) has announced trials aimed at stimulating retirement saving among Britain’s 4.8 million self-employed. New approaches that would allow self-employed people, around 15% of the UK workforce, to save for short, medium and long-term financial goals (for example, catering for those with irregular incomes) will be tested through trials and research to be launched imminently. Automatic enrolment has transformed pension saving with almost 10 million people automatically enrolled since 2012. Now, the government is looking at methods of encouraging the self-employed to put away money for later life.

The trials focus on three areas: • Marketing interventions aimed at people who have previously saved (for example, after being automatically enrolled whilst employed) to encourage them to continue their saving behaviour. • Marketing interventions using trusted third parties for the self-employed (such as trade bodies/unions etc.) to promote the value of saving and provide an easy connection to an appropriate savings vehicle, and • Behavioural prompts – testing messages combined with prompts through invoicing services and/or the banking sector to seek to engage self-employed people to think about starting a regular saving habit at a point when they are receiving income. More information about these trials is available from the gov.uk website. Search: pensions and long-term savings trials for self-employed people.

What is CDC and howmight it work in the UK? The Pensions Policy Institute (PPI) has published a report exploring the defining features of Collective Defined Contribution (CDC) schemes, as well as the potential benefits they may offer and the hurdles they are likely to face in design and operation. CDC schemes could offer a middle ground between Defined Contribution (DC) and Defined Benefit (DB), providing members with greater certainty about the retirement outcomes they will achieve than would be possible in a DC scheme, while providing greater certainty about costs for employers than a DB scheme. Despite the fact that CDC has been discussed several times in recent years as a possibility for the UK, there’s still some uncertainty about how it would work in practice. This research seeks to demystify CDC and the considerations that are likely to be important as it develops in the UK.

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Managing longevity In many retirement advice decisions, how long the client will live can be more important than the return on investment. While the average male at 65 may be predicted to live to 87, statistically this varies by around 20 years depending on their health and lifestyle. Most advisers have become very good at modeling cash flow, but struggle to model longevity.

FCA rules require all advice to be personal to the circumstances of the individual. Using standard longevity predictions, from ONS or similar, is not personal nor sufficient. It’s like assuming all clients have an average pension pot and the same attitude to risk! Advisers must assess longevity on a personal basis to avoid challenges later on. One solution to the longevity conundrum is to obtain an annuity quotation. 70% of consumers, at retirement age, qualify for an enhanced/ impaired annuity, yet far too many annuity quotations have no medical information. Obtaining a standard annuity quote, with no medical information, is likely to lead to a lower value annuity quotation, and to incorrect advice. Advisers are already being sued, and have FOS decisions against them, for not considering an impaired annuity. Like all advice recommendations, there must be clear evidence that the consumer’s personal circumstance, in this case their health has been properly assessed. If advisers don’t have clear evidence that they understood the client’s health and have assessed their longevity, then they have little evidence to defend themselves against a claim. The requirement for detailed medical advice for annuities has slowly increased over the years. Annuities used to be all standard. Then the industry added smoker rates. Then impaired and enhanced rates. Advisers need to modify the way they assess client’s medical status to keep in line with these changes. It’s common for advisers to approach this by way of a quick conversation, asking the client about their health, prior to deciding

whether or not that consumer is in good health. Though if a nurse were to have a similarly quick conversation with a client, and said they could buy their draw down online without advice, there would be outrage, as the nurse is not qualified to make such decisions. Making this sort of decision in ten minutes is likely to be inadequate for a significant number of clients. It’s unlikely the client would divulge all their financial information to a nurse, as the nurse doesn’t understand the topic. In the same way, it’s unrealistic to assume a quick conversation on someone’s health is sufficient. Clients won’t necessarily divulge all the relevant information to their advisers as they’re not medical experts, nor is it likely that advisers will understand what they’re being told. What’s more, these areas can be personal and uncomfortable for the client to discuss. Statistics show that although 70% of consumers qualify for an enhanced annuity, the average rate granted is far less than this. MorganAsh provide two solutions for advisers; full medical underwriting annuity quotes, and individual longevity predictions. Both solutions are based on the client’s individual health and lifestyle circumstance and involve a full medical assessment of the client’s health. The life planning report provides an estimate of the client’s longevity (see example chart ‘likelihood of survival over time’), as opposed to an annuity quotation. The life planning report has the advantage of giving estimates of longevity per year, so understanding the chance of survival at say age 90 being 30% or 1% can be used with the estimates of returns of different investment classes. If there’s a chance an annuity may be part of a retirement strategy, then it’s better to obtain an annuity quotation. If an annuity is never going to be part of the strategy, then a life planning report gives a better estimate of longevity at different ages.

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Guest article

in draw down

As well as a personalised assessment of longevity and a report for the compliance file, using an external company like MorganAsh has several other advantages: • As professional nurses undertake the medical assessments, this typically results in better annuity rates, than most advisers completing the health form. • It removes the embarrassment that advisers sometimes experience, especially for advisers discussing health issues with female clients. • Having an independent longevity estimate, enables a more in depth discussion on longevity and the various scenarios, helping to overcome the natural embarrassment to discuss the topic. So how often do you need to assess longevity ? Technically, an assessment of longevity should be undertaken whenever giving retirement advice (for example, at the initial retirement planning stage and at every annual draw down review).

Rather than instigating this professional medical review every year, advisers may choose to only instigate it if their client’s health has changed, or every few years with increasing frequency as clients get older. Assessing longevity is even more important for DB transfers, as there is a clear decision to give up the in-built longevity hedge. MorganAsh can be contacted at annuity@morganash.com or 0330 159 8185

Likelihood of survival over time

100%

75%

50%

25%

0%

65

80

95

110

119

Special arrangements are available for clients of threesixty with MorganAsh For more information on these, and other specialist outsourced services, visit the Business/ Specialists section of the threesixty website.

Andrew Gething Managing Director MorganAsh

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Despite a rising risk profile, Enterprise Investment Scheme (EIS) investments provide fantastic growth opportunities for investors, especially where they have maxed out their pension and ISA limits. The new restrictions on asset backing were a positive step from the adviser perspective, as EIS is now easier to advise on, and it’s contained within one risk bucket. In February 2019, there were 63 open EIS offers available in the market, so there’s certainly ample choice. But what questions should you be asking as an adviser? Five questions to ask w Enterprise Investment S

What are the fees? Fees across EIS offers are not homogenous, and this is a serious consideration to be aware of. Fees come in the form of annual management charges (AMC), initial fees, and performance fees to name just a few. Of course, this is an area that requires significant research and due diligence, so higher fees are to be expected. According to MICAP data, the average AMC for open EIS offers in February was 1.65%. The highest initial charge amounted to a significant 5%. High fees can erode away returns, especially over the long term. This is worth considering as EIS investments are realistically long term investments. A five to ten year time horizon should be expected, rather than the three year minimum holding period to be eligible for income tax relief. Fees can also be levied on investee companies. This means that the underlying companies are receiving less of the funding they require to grow their business towards a profitable exit.

Is the manager robust? With the realistic time horizon of an EIS investment being so long, advisers should question how robust the manager is. Will the manager be around in ten years to fulfil a long term venture capital investment? EIS managers, in general, are rather small financial institutions in comparison with some of the large fund managers. It’s also worth considering that EIS investments do not qualify for FSCS protection.

14

Guest article

en selecting an heme

John Schaffer Investment writer Intelligent Partnership

How many exits have they had in the past 12 months? Publicised exits are few and far between in the EIS marketplace, so it’s key to ask managers what their exit track record is like. Advisers should also be mindful of what sort of exit has occurred. Was the exit involving a true growth company that would be in line with the current risk-to-capital rules? There have been significant success stories in the EIS marketplace. In 2018 Par Equity achieved a 75x return for investors with its ICS Learn investment. Other notable EIS exits included Gear4Music and Buying Butler. Good managers can pick more winners, but they can also accelerate an exit event through their guidance and network, such as a series A funding round. However, there will also be failures, especially now that the focus is purely on growth capital since the 2017 Budget (and loss relief may be available on these). It’s prudent to expect around a third of EIS investee companies to fail. However, these failures should be offset by the success of the winners. Transparency over failures among EIS providers should be seen as a positive, as these are inevitable. Most providers will assign a value to their current EIS portfolios. However, this value can

Is enough being done to mitigate tax risks?

be somewhat arbitrary if it’s based on unrealised investments. Real value is only generated upon the exit of an investee company.

Fundamentally, Advance Assurance is king. If it isn’t in place, don’t touch it. How quickly a manager can deploy capital is another consideration. Investors will only receive income tax relief when the manager has deployed the capital and has issued an EIS3 form. According to MICAP data, the most common timeframe for deploying EIS capital is 12 months, but some EIS managers are deploying capital in 18 months or more. Investment managers will be reliant on there being suitable deal flow available, and this is not necessarily guaranteed.

Is the manager a generalist or a specialist? Does the EIS manager have a sector focus, or is it a generalist? For example some EIS managers will have a sector focus in technology or medical applications. Specialists have the opportunity to garner a better network and knowledge of a chosen sector, whilst generalists have more scope to diversify. After the 2017 Budget rule changes, many managers pivoted their offerings from an asset-backed focus to growth capital. It’s worth scrutinising whether these managers have adequate experience as a growth investor.

There’s certainly no shortage of opportunities, but managers will have to do their due diligence to find investments that have the best growth prospects for their clients.

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Getting to grips with product governance It’s almost 15 months since the introduction of MiFID II, yet the fallout continues. Intermediaries are still getting to grips with the implementation of aggregated costs and charges disclosure requirements.

What is product governance and what do you need to do? Product governance is the term used to describe the process of designing, approving, marketing and providing ongoing management of a financial product throughout its life cycle. Formal rules for product governance were initially introduced with MiFID II. The obligations apply to MiFID investment products such as, unit trusts, OEICS (as well as structured products) and investment trusts and services, such as investment advice and portfolio management. The Insurance Distribution Directive (IDD) also introduced product governance requirements for all insurance products, including insurance based investment products, such as investment bonds. It’s the responsibility of product manufacturers to ensure their products are designed to meet the needs of an identified target market, and that their distribution strategy is consistent with this. This target market information must be communicated to distributors of these products.Manufacturers must also identify, and communicate to distributors, any client groups for which their products are not compatible. This is known as the negative target market. To present their target market information, product manufacturers should identify and assign broad categories for each fund or product, such as; investor type, knowledge and experience, ability to bear losses, risk tolerance and client objectives and needs, to assign each fund or product.

Issues with transaction reporting, and tighter rules on inducements linger, whilst other matters expected to have caused debate, such as the new definition of independent advice, and the introduction of telephone recording, appear to have passed by with little comment. Initially it seemed the introduction of formal product governance rules had also slipped under the radar, but in recent months, they’ve come to the fore. The regulator is expected to be sharpening its focus in this area during 2019 for manufacturers and distributors alike. There has been some confusion over how product governance obligations can be met by intermediary firms, and how the concept fits with existing investment processes, the running of an investment committee and individual client suitability requirements. Which firms are manufacturers and which are distributors? Product manufacturers are firms that design, create, develop and issue financial instruments or insurance products. In simple terms, product and fund providers. Distributors are firms that offer, or sell, investment or insurance products, or services to clients. Advisory firms and discretionary managers will be distributors in this context, although the latter could also be classed as a manufacturer. Where the DFM service is wrapped within a product structure (for example, a unitised model portfolio service) the requirements for product manufacturers will apply to the product in question.

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Most fund groups are using the European MiFID Template (EMT). Target market data may also be obtained through third party research tools, or via investment platforms. Platform providers should obtain relevant target market information and present it to platform users.

The product governance rules are not explicit with regards to client segmentation, but it’s the identification of your target markets that needs to be sufficiently granular. Criteria worth considering for this segmentation exercise could be: • Client type (retail or professional). • Life stage (for example, accumulation, consolidation, planning for retirement, decumulation). • Knowledge and experience. • Ability to bear financial loss. • Risk tolerance. • Client objectives and needs (such as investment term, objective or protection/ growth of capital or future income need). Having defined the different segments that make up your client base, you need to define the services and solutions you will offer to each segment of clients. Just, make sure you have the systems and processes in place to deliver them. Your centralised investment proposition has to be aligned to the needs of your target clients. It’s important to have a clearly defined and repeatable process to perform this task. For this reason, we recommend that, where possible, you establish an investment committee (or similar body). The role of an investment committee is to provide a defined framework for centrally overseeing your firm’s investment process, including product and fund approval, and keeping those selections under review. An investment committee is also the ideal forum for overseeing your selection of insurance products. As with all processes, it’s vital that decisions are appropriately documented. Using the investment committee terms of reference and minuted decisions is one way to achieve this. Clearly, you still need to demonstrate suitability on an individual case basis, but a product governance structure needs to sit above your advice or investment management processes to support your firm’s investment choices as a whole.

What are the responsibilities of distributors?

What steps can you take to meet your product governance obligations? Client segmentation is an effective way of defining your target markets. You may have undertaken segmentation exercises in the past, for example to identify appropriate service levels for segments of your client bank, or to examine revenue generation trends. Segmentation for the identification of target markets is about establishing the types of clients you have and what services and products are, and are not, suitable for them. It’s a key part of your product governance obligations, but perhaps more importantly, it can help you to offer targeted services and solutions, which in turn, should benefit both your clients and business. • Distributors must ensure that staff involved in the distribution of the relevant products have the appropriate knowledge and competence to understand the nature and risks of each products. This is nothing new and should not present a challenge. Existing training and competence requirements and internal standards and testing for relevant non-advising staff should cover this comfortably as long as documentation is thorough and kept up to date. • Distributors must assess the needs of their clients, and the compatibility of each product. Taking in to account the target market information identified by the product manufacturer.

Jon Roberts Policy consultant threesixty services

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Maintaining When reviewing the implementation of a firm’s Training and Competence scheme, we encounter the same common issues. If When undertaking appropriate CPD your emphasis should be on quality, not quantity.

It should answer questions like: • Did the activity meet my learning needs ? • How has the activity benefitted me professionally ? And include: • How you felt about the activity and the effectiveness of the learning and learning method.’ For example, if your objective is to ensure you’re maintaining your pension knowledge, a reflective statement could be along these lines: ‘The calculations provided within the learning material have helped me develop a better understanding of the tapered annual allowance. I now have the required technical knowledge in this area’. There’s no prescribed length to a reflective statement. But, the length of statement should reflect the length of the activity. An activity lasting an entire day should therefore be more detailed than an activity lasting 30 minutes. We often come across examples where a third party (for example, an administrator or assistant) has completed CPD on behalf of the adviser. The third party can record the activity, content and time spent, but don’t ask them to complete your reflective statement without input. They won’t be able to! Reflective statements should always be unique to the person undertaking the activity.

you’re subject to CPD recording requirements, either from a regulatory perspective, or as a requirement of a firm’s T&C scheme, you may find the following tips useful. Obtain and record your CPD on a regular basis We often see CPD being recorded annually, just prior to the renewal of a Statement of Professional Standing (SPS). If CPD isn’t recorded in a timely manner it can be difficult to remember what you did and why, resulting in poorly completed records. Obtain and record your CPD on a regular basis. Setting yourself targets to complete CPD on a regular basis will help you achieve your annual requirement more easily. For example, if you need to complete 15 hours in relation to IDD, consistently completing just over an hour each month makes it much more achievable. Personally, I set myself a diary note for the first Monday of each month. Recording it routinely certainly helps me. Record reflective statements promptly and with care Reflective statements are often poorly completed. More often than not, they’re rushed due to being completed at the last minute. Sometimes, it’s because the individual doesn’t realise what it is they need to record. One accredited body has stated ‘A reflective statement is a statement of the outcomes achieved.

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competence If you can’t record your CPD straight after the activity took place, I recommend you make a note of it somewhere so you can refer to it at a later date and retain evidence of the activity (for example any notes you’ve taken or handouts). An accredited body can ask that you enhance your records. Do everything you can to get it right first time. Relevance We’re often asked how many hours of CPD a mortgage adviser should record. There’s no definitive answer, it’s something that should be agreed between the adviser and their supervisor, but I’d recommend a minimum of 15 hours (or for a mortgage and protection adviser, 15 hours for mortgages, and 15 hours for protection), although some firms state 35. Whatever’s decided, it should be confirmed in your firms T&C Scheme.

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Whether it’s proactive, or reactive (perhaps in response to a client enquiry or change in legislation) all CPD counts, as long as it’s relevant. CPD is one way to ensure you’re maintaining and enhancing your knowledge and skills. Many business owners advise, and are also their firms Money Laundering Reporting Officer (CF11) and Compliance Oversight (CF10). In these cases we often see CPD recorded in relation to their advisory role, but invariably not in respect of their other roles. We see similar occurences when advisers provide advice in several specialist areas, such as pension transfers, long term care, and equity release. I recommend occasionally reviewing what you’ve recorded to ensure it reflects all of your role(s). Number of hours Most people are required to record a total of 35 hours (21 of those structured) in each 12 month period. This doesn’t mean that CPD should stop once you’ve fulfilled this requirement. ‘C’ stands for ‘continuing’. It’s best practice to keep going.

Since 1 October 2018 individuals involved in insurance distribution activities are subject to a minimum of 15 hours CPD in a 12 month period. The point to note is the 15 hours is not in addition to those individuals subject to the 35 hours requirement, it’s inclusive of. Supervisors Supervisors should review their staff’s records thoroughly. When reviewing one to one meeting forms, we often see supervisors noting that their staff have recorded a sufficient number of hours, but nothing else. Supervisors should look beyond the number of hours recorded and instead consider their relevance (referring back to a development plan). Reflective statements should be reviewed, in particular where there’s relevant evidence of insurance related CPD activity. Dependent on the frequency of one to one meetings, supervisors may need to review the records more frequently. Having access to records 24/7 will help. threesixty’s CPD recording facility allows registered supervisors to access the records of their colleagues at any time.

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