Compliance Digest - 17th May 2024

Welcome to this week’s Compliance Digest.  Here is a summary of issues that have been highlighted in my various industry news feeds over the past seven days.

Feel free to share this Blog within your firm or industry network.

• Warning: Beware of the SharePoint 365 scam

• Labour may reintroduce the Lifetime Allowance in April 2026

• Lump Sum and Death Benefit Allowances

• CP24/7 Payment optionality for investment research

• Ongoing service to clients

• Sustainability and Greenwashing

• 'Finfluencers’ charged for promoting unauthorised trading scheme

Warning: Beware of the SharePoint 365 scam

Alasdair Walker of Handford Aitkenhead & Walker has written in New Model Adviser about a phishing email he recently received.  The whole article is in the link above, including the perceived weaknesses in SharePoint 365, some of it is copied and pasted below.

“I received an email the other day from a financial planner in Liverpool.  It seemed innocuous enough.  I glanced at the email address and the signature at the bottom.  Neither gave me cause for concern.

The email address was rebecca@sidewaysfinancialplanning.co.uk (I’ve changed the name to protect the firm involved) and the subject line was ‘portfolio report & proposal’.  The email itself said ‘see below for review’ and had a forwarded email that included a ‘secure email’ with a link to view the attached message.”

“I might well have clicked the link but, as I’m paranoid, I phoned the company to confirm Rebecca worked there.   She did.  However, she wasn’t working at the time the email was sent.

It turns out Rebecca’s email account had been hacked, presumably because she clicked on a similar link received from another business.

The firm had fallen victim to a sophisticated phishing attack.”

“But even with the best security policies and training in place, any one of us could fall for this kind of sophisticated, targeted attack.  Be paranoid, be curious and ask the following questions when dealing with emails:

• Am I expecting this?

• Can I verify it with the sender?

• Am I being asked to log in to something when I click a link?

• Is my team trained and aware of the risks?

• … and finally, if you have any doubt whatsoever, do not engage!”

Many scam emails are obvious, the sender and email address are completely different.  Others less so.  If in doubt, call the firm for confirmation on a verified telephone number (from the firm’s website or the FCA Register) and follow your firm’s phishing email policy if the email is not genuine.

Labour may reintroduce the Lifetime Allowance (LTA) in April 2026

Citywire New Model Adviser has reported that the Labour Party is likely to bring back the LTA if it wins the general election, according to former Pensions Minister, Steve Webb, although at a higher level to when it was abolished – estimated to be £1.5 million.

Given the potential timing of the next general election, and assuming Labour is the largest party and forms a government, there will not be sufficient parliamentary time to reintroduce the LTA for the 2025/26 tax year, it would likely to return in April 2026.  Reports indicate that Labour will not create separate rules for doctors and other public service workers if it reinstates the LTA.

Given all the complications arising from abolishing the LTA, reinstatement will not be a straightforward issue either.  There will need to be a transitional regime for those who have taken advantage of the abolition.

With the Consumer Duty requiring advisers avoiding causing foreseeable harm to clients, you will need to keep a careful eye on the statements from the main political parties and once there is clarity, advise your clients that will be affected accordingly.

The LTA was introduced on 6th April 2006 at £1.5 million.  According to the Bank of England inflation calculator, it would be approximately £2.4 million today.

Compliance Matters UK Limited will be able to help you navigate the changes as they become clearer and assist you with your client communications.

Lump Sum and Death Benefit Allowance

The announcement of the abolition of the LTA in Spring 2023 also introduced two new allowances which will restrict the amount of tax-free lump sums which could be paid under the new pension regime.  These will be important considerations for clients who were close to, or exceeded, the LTA prior to the announcement of the changes. 

The new Lump Sum Allowance (LSA) is the upper limit on the tax-free cash someone can take from their pensions during their lifetime and is capped at 25% of the previous LTA, i.e. £268,275. 

The second allowance, the Lump Sum and Death Benefit Allowance, will restrict the tax-free lump sum which can be paid from pension funds to beneficiaries if your client dies before their 75th birthday.  The Lump Sum and Death Benefit Allowance is set at £1,073,100 and the regulation does not have any provision for either this or the LSA to increase over time to keep pace with inflation.  Clearly, this may also change with a change of Government.

The Lump Sum and Death Benefit Allowance (LSDBA) is the limit on the total amount of tax-free lump sums that can be paid in respect of an individual before marginal rate taxation arises.  This includes any tax-free lump sums used up under the LSA, any benefits paid as a serious ill-health lump sum before age 75 or any tax-free lump sum death benefits payable in the event of your client’s death before age 75.  As stated, the limit is £1,073,100 but may be higher if your client has an LTA protection.

Each time your client takes a tax-free lump sum from their pension, or a tax-free lump sum is paid following death before age 75, your client will use up some of their Lump Sum and Death Benefit Allowance.

Care must be taken with clients who are over the LTA as it was in Spring 2023.  As they use their LSA, you will need to keep a careful record of the impact on the LSDBA and ensure you communicate this to your clients as it reduces otherwise they may create a tax charge.  Once again, not creating foreseeable harm to your clients is the key to this record keeping and communication.

If you would like help in navigating these allowances for an individual client, please contact Compliance Matters UK Limited.

CP24/7 Payment optionality for investment research

On 10 April 2024, the FCA published CP24/7 on payment optionality for investment research.  This followed the UK Investment Research Review, in which recommendations were made to help boost the UK investment research market.  A key recommendation was for the FCA to amend its rules on research unbundling to allow FCA-authorised investment managers more flexibility in how they pay for research.  This included a recommendation that the “rebundling” of research and execution charges be permitted.

The proposals do not return the regime to a pre-unbundling approach but will create an exception for investment managers that are willing to use a Commission Sharing Arrangement (CSA) with brokers who are prepared to offer a CSA.  This will give limited relief to managers that are subject to the rules on research; the rules no longer apply to fixed-income research, which is good for credit fund managers.  

Under FCA’s proposals, firms that choose to offer bundling to their clients will be required to put in place:

• A formal policy on bundling

• A budget for purchasing third-party research and ongoing assessments of value and price

• An approach and structure for allocation of costs to clients and payments to research providers

• Operational procedures for the administration of research payment accounts

• Disclosures to clients on bundled payments, significant research providers and costs incurred

In reality, complying with the proposed requirements associated with ‘re-bundling’ advice will create a not insignificant administrative burden and it remains to be seen how attractive this option will be in practice.

The consultation closes on 5th June 2024 with a policy statement shortly thereafter.  Compliance Matters UK Limited is available to help you through the changes should you wish to take advantage of them.

Ongoing service to clients

This is becoming a hot topic and, according to New Model Adviser, Law firms and CMCs are circling and see ongoing advice claims as the next PPI.  We know that SJP are conducting a five-year back-book review and Quilter is under similar regulatory scrutiny.

What can you do in your firm?

• Initially you need to assess what your clients expect; an annual review, semi-annual reviews or maybe no annual reviews.  This will be in the Terms of Business that your client signed.

• Your back-office system should be able to give you the MI that tells you if clients have not received a review when it was due.  It should also tell you how long it has been since your client has received an annual review.

• What do your processes and procedures say on the subject, and do they need to be updated?

• Is having up-to-date annual client reviews a KPI in your T&C Scheme?  What qualitative levers are in place to address circumstances in which the adviser is behind with reviews.

• Once you have identified if your firm has an issue with missed annual client reviews, you need to quantify how many clients are affected and what do you do redress them.

Compliance Matters UK Limited can help with reviewing how up to date you are with client periodic reviews and put in place remedial action if required.

Sustainability and Greenwashing

The FCA’s new anti-greenwashing rule and guidance (AGR) will come into force on 31st May 2023.  Tackling greenwashing is a priority for the FCA.  The AGR was introduced as part of a package of measures designed to inform and protect consumers and improve trust in the market for sustainable investments.

With a couple of weeks left to ensure that firms are compliant with the AGR, what are the key elements that firms need to be thinking about, in particular given that there are still uncertainties as to the scope of the rule?  We have set out below key considerations.

The AGR is set out in a new Chapter 4.3 of the Environmental, Social and Governance sourcebook (ESG) in the FCA Handbook.  

The new rule (ESG 4.3.1R) will require “any firm that:

• communicates with a client in the UK in relation to a product or service; or

• communicates a financial promotion to, or approves a financial promotion for communication to, a person in the UK,

to ensure that any reference to the sustainability characteristics of a product or service is:

• consistent with the sustainability characteristics of the product or service; and

• is fair, clear, and not misleading.”

The finalised non-handbook guidance on the anti-greenwashing rule (FG24/3) provides further colour on what is expected of firms and also how the anti-greenwashing rule interacts with other requirements such as the Consumer Duty, the financial promotion rules in COBS 4, and the FCA’s Principles for Businesses.

The law firm Herbert Smith Freehills as written a blog that gives firms more detail.

'Finfluencers’ charged for promoting unauthorised trading scheme

Some good news, in a Press Release the FCA has confirmed that it has brought charges against nine individuals in relation to an unauthorised foreign exchange trading scheme promoted on social media.  Hopefully this is the first of a number of similar actions.  I have to admit that I have not heard of any of the nine defendants and I am none the wiser seeing their pictures on the coverage in This is Money.

If you have any questions in relation to any topics within this article, please feel free to schedule a call to discuss further.

Ian Ashleigh