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This week in regulation

09/04/18

The Speed Read

  • Insurers are still failing to meet FCA insurance renewal expectations
  • Further consultation issued on PSR regulatory fees
  • FCA publishes findings on non-advised pension drawdown sales
  • Next steps outlined for improving competition in the Asset Management sector

Insurers still failing to meet FCA insurance renewal expectations 

The FCA has issued a warning to all general insurance firms saying it will take action against those who have failed to implement renewal rules, which were introduced to improve transparency and encourage consumers to shop around for alternative providers.

The renewal rules (introduced April 2017) require firms to clearly display the insurance premium a customer paid last year alongside their renewal premium and to provide a clear message encouraging them to shop around. The FCA has found that firms are still not meeting these expectations, despite an earlier warning issued in October 2017.

  • The initial warning highlighted four failings the regulator had uncovered:
  • A failure to implement the new rules for all products and customers;
  • Incorrect reporting of last year’s premiums;
  • Omission of the ‘shopping around’ message, or not presenting it in a clear, attention-grabbing way; and
  • A failure by some firms to correctly identify all customers requiring renewal information, whether due to system errors or an incorrect interpretation of the type of customer covered by these rules.

As a result, all general insurance firms are expected to review their renewal processes to ensure they are meeting expectations and take steps to address any failings uncovered.

FCA issues further consultation on PSR regulatory fees

The FCA launched a review of the regulatory fees regime for the Payment Systems Regulator (PSR) in summer 2017 and has now issued a further consultation paper which sets out the decisions made following feedback to CP17/44 and includes further questions.

CP18/8 outlines:
― The fee allocation method, including a methodology for allocating PSR fees based on transaction volumes and values; and
― Details of the fee collection methods used, including the provision and verification of transaction data.

  • The regulator also outlines a number of additional proposals for consultation, including:
  • Its future approach to publishing annual PSR fees;
  • 2018/19 PSR fees;
  • Updating the definition of relevant transactions to include Cheque & Credit (C&C) transactions processed through the Image Clearing System (ICS);
  • The approach to on-account fee collection from 2019/20 onwards; and
  • The approach to refunding underspend, including the 2017/18 underspend.

FCA publishes findings of non-advised drawdown sales review  

Since the introduction of the pension freedoms, there has been a significant increase in consumers opting for drawdown over annuity products. As this is a complex decision, consumers opting to proceed without advice are reliant on the information provided by firms and there is a risk that this could result in poor financial outcomes. The FCA conducted a review of non-advised drawdown sales to see whether firms were providing consumers with the necessary information, in line with regulatory requirements.

Overall, the regulator found that firms were broadly meeting their obligations to consumers, communicating in a clear, fair and not misleading manner. However, some consumers aren’t engaging with the information provided, leaving them open to increased risk. This includes customers who choose to access their retirement income ahead of their retirement date and make the decision to enter drawdown before contacting firms without fully exploring the full range of options available to them.

The regulator also identified some instances where firms did not fully meet FCA requirements during the sales process, including:

  • Not providing an Open Market Options Statement (OMO) prior to selling a pension decumulation product, although this information was generally available elsewhere or highlighted during conversations;
  • Not providing the OMO or KFI in a durable medium, although the information is provided online and is comprehensive; and
  • Charges are not consistently disclosed.

FCA outlines next steps for improving competition in the Asset Management sector

In its latest announcement following its asset management market study, the FCA has published its planned next steps to address the concerns identified. Policy statement (PS18/8) outlines remedies to protect consumers from weak competition, including:

  • Final rules requiring fund managers to conduct an annual assessment of whether charges are justifiable in the context of the overall value of the fund;
  • Rules requiring the boards of Authorised Fund Managers (AFMs) be made up of at least 25% independent directors (with a minimum of two independent directors);
  • A new prescribed responsibility for AFMs under the Senior Managers & Certification Regime (SM&CR) for a Senior Manager, usually the Chair of the Board, to take reasonable steps to ensure the firm fulfils its regulatory obligations and acts in the best interests of investors;
  • New rules to prohibit fund managers from retaining risk-free box profits; and
  • Revised guidance to enable fund managers to move investors to cheaper share classes more easily, where this is in their best interests.

Alongside the policy statements, the FCA has published a consultation on measures to improve the quality, comparability and robustness of information provided to investors. These proposals include:

  • Guidance on expressing fund objectives and investment policies to ensure they are useful to investors;
  • New rules requiring AFMs to explain the rationale behind their use of benchmarks, or if benchmarks aren’t used, how investors should assess the performance of the fund; and
  • Changes to performance fee rules so they are calculated based on performance net of fees.

The Investment Association (IA) has also proposed working alongside consumer representatives to promote the consistent use of technology.

As part of its wider work in the asset management sector, the FCA has undertaken research looking at how charges are presented affects investors’ decision-making and understanding of charges.

This involved a simulated online platform where the impact of different ways of presenting charges was tested. The FCA found that all four methods tested increased the proportion of investors opting for a cheaper fund and the increased focus on charges didn’t appear to reduce investors’ focus on other characteristics such as performance or risk. Warning messages appeared to improve decision-making, particularly if accompanied by a summary of charges or an outline of the impact of those charges. Overall, information had the most impact when it was prominently displayed on mandatory pages.

While providing investors with this information doesn’t guarantee they will use it, the study shows the effectiveness of disclosures can be improved by clearly presenting information in an understandable and engaging way.

 

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