Insurers now subject to SM&CR: This week in regulation


The Speed Read:

  • Insurers now subject to the Senior Managers and Certification Regime
  • FCA responds to the CMA’s investigation into the investment consultancy market
  • FCA proposes changes to enable consumers to invest in patient capital
  • Regulator consults on permanent measures to restrict the sale of retail CFDs and binary options
  • Individual pleads guilty to illegally operating an investment scheme and two counts of fraud

Insurers now subject to the Senior Managers & Certification Regime (SM&CR)

The insurance industry has reached a major milestone this week as the Senior Managers & Certification Regime is extended to include all dual regulated insurers and reinsurance firms.

The regime replaces the Senior Insurance Managers Regime (SIMR) and is designed to increase individual accountability. SM&CR is already in place within the banking sector and will be extended to solo-regulated firms on 9th December 2019. If you haven’t already started your SM&CR preparations ahead of next year’s implementation, here are our experts’ top tips on preparing for the new regime.


FCA responds to the CMA’s investigation into the investment consultancy market  

The Competition and Markets Authority (CMA) has published its final report into its market investigation of the investment consultancy and fiduciary management sectors, following a reference made by the FCA as part of its asset management market study in 2017. The FCA made this reference because it had serious competition concerns within both markets.

The CMA identified competition issues across both market. The investigation found that fiduciary management providers had an incumbent advantage as pension schemes often chose the same provider that they used for investment consultancy. Prospective customers often didn’t have access to clear information about fees or historic performance and the cost of switching is also relatively high.

In the investment consultancy market there is low levels of engagement by some pension schemes when choosing and monitoring their provider. It is also difficult to access information about the quality of the provider. These features make it difficult for scheme trustees to drive competition, thereby reducing the incentives to compete.

To address these failings, the CMA has proposed a package of remedies:

  • Introducing mandatory tendering for pension trustees looking to purchase fiduciary management services for the first time and requiring trustees to run a competitive tender within five years if fiduciary management services were obtained without a tender
  • Requiring investment consultants to sperate the marketing of their fiduciary management services from the promotion of their investment advice
  • The Pensions Regulator (TPR) to provide greater support for pension trustees running tenders and guidance on the other proposed remedies
  • Requiring fiduciary managers to provide clearer, more comparable information on fees and performance
  • A requirement for pension trustees to assess the quality of the investment advice they receive through the setting of clear investment objectives
  • Introducing basic minimum standards for performance reporting across both investment consultancy and fiduciary management
  • Recommending that the government extends the FCA’s regulatory perimeter to cover all of the main investment consultancy activities and enable TPR to oversee the implementation of its remedies aimed at pension scheme trustees.

Responding to the CMA’s report, Christopher Woolard, the FCA’s Executive Director of Strategy and Competition, said: “We welcome the CMA’s in-depth analysis of both investment consultancy and fiduciary management services and support the package of remedies proposed. It is essential that competition works well as these services have a significant impact on the retirement outcomes of millions of pension savers. We will continue to work closely with the CMA, HM Treasury and The Pensions Regulator to implement the CMA’s remedy package and take forward the recommendations in its report.”


FCA proposes changes to enable consumers to invest in patient capital

In his 2018 Budget, the Chancellor, Philip Hammond, announced a package of measures to boost investment in patient capital, a broad term covering a range of alternative investment assets, including infrastructure, venture capital and private equity. To enable this, the FCA has published proposals to enable retail investors to invest in these assets through unit-linked funds.

The proposals are designed to address any unjustified barriers to retail investors looking to invest in such assets, while also ensuring an appropriate degree of investor protection. The changes include:

  • Providing additional information around the permitted links requirements in COBS 21.3
  • Introducing revised wording to broaden the range of permitted link categories
  • A new limit restricting the overall investment in illiquid assets within a linked fund to no more than 50% of the total fund
  • Introducing risk warnings to educate consumers on the liquidity risks involved in investing in these types of funds.

To accompany this consultation, the regulator has also published a discussion paper to explore the impact of the regulatory regime on investing in patient capital assets through authorised funds. The paper asks for perspectives on whether the current limits on investments in patient capital are appropriate, whether there is market demand for a new type of fund that can invest all its capital in patient capital assets and whether the rules should be amended to make it easier to invest directly in infrastructure projects.


Regulator consults on permanent measures to restrict the sale of retail CFDs and binary options

The FCA has published a consultation outlining its plans to address consumer harm from the sale of certain complex derivative products by banning the sale, marketing and distribution of binary options to retail investors and restricting the sale, marketing and distribution of contracts for difference (CFD.

These measures mirror the European Securities and Markets Authority’s (ESMA) existing temporary restrictions on these products, however the FCA is extending them to closely substitutable products. The changes include:

  • Limiting the leverage to between 30:1 and 2:1 by collecting a minimum margin as a percentage of the overall exposure
  • Closing out a customer’s position when their funds fall to 50% of the margin required to maintain the open positions on their CFD accounts
  • Introduce protections so investors cannot lose more than the total amount in their CFD account
  • Ban on inducement (both monetary and non-monetary) to encourage trading
  • The introduction of standardised risk warning which disclose the percentage of retail client accounts that make losses.

The FCA estimates that these changes to CFDs could reduce retail investors’ losses by between £267.4m and £450.7m a year, with a permanent ban on binary options saving them up to £17m a year.


Individual please guilty to illegally operating an investment scheme and two counts of fraud  

An individual has pleaded guilty to four charges relating to the operation of an unauthorised investment scheme, including charges of misleading consumers and two counts of fraud. The FCA believes the individual received approximately £600,000 in customers’ funds.

The hearing has been adjourned until 7th January 2019 to allow the defendant to review the prosecution evidence and will be sentenced in due course.

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