Compliance Digest - 12th April 2024
We have survived tax-year end and now have the challenge of Transitional Tax-Free Amount Certificates. The end of the week, however, has been dominated by the FCA’s Final Notice to Link Fund Solutions and the Warning Notice Statement to Neil Woodford. With the first Consumer Duty Board reports due in just over three months, there is a focus on what should be in the report.
FCA sets out findings against Link Fund Solutions
Transitional Tax-Free Cash Certificates
British Savings Bonds
Review of firms' treatment of customers in vulnerable circumstances
Consumer Duty Board Report
FCA sets out findings against Link Fund Solutions
In a press release this week, the FCA has found that Link Fund Solutions (LFS) failed to act with due skill, care and diligence in its management of the Woodford Equity Income Fund (WEIF). Between 31st July 2018 and the fund's suspension on 3rd June 2019, LFS failed to manage the liquidity of the fund - or how easily assets in the fund could be turned into cash - so that investors could access their money at short notice.
LFS also failed to properly oversee Woodford Investment Management (WIM) or to sufficiently ensure that concerns about liquidity were acted on. In a separate action, the FCA has issued warning notices to Neil Woodford and WIM proposing to take action against them for their conduct in the management of the WEIF.
The LFS final notice confirms the failings which led to the FCA's investigation and subsequent agreement from LFS to settle the enforcement case and provide compensation to those affected. Those invested in the WEIF when it was suspended are starting to receive a share of the up to £230 million redress scheme, which was approved by the High Court in February. The Warning Notice Statement confirms that on 19th February 2024, the FCA gave each of Woodford Investment Management Limited and Neil Woodford a warning notice proposing to take action in respect of the conduct summarised in the statement. WIM acted as the investment manager of the LF Woodford Equity Income Fund and Mr Woodford acted as WIM’s Head of Investments and the lead fund manager for the WEIF.
Transitional Tax-Free Cash Certificates
Historically, the lifetime allowance (LTA) was the total amount of pension savings (apart from the State Pension) that a client could build up while still getting the full tax benefits.
From 6 April 2024, new legislation allows individuals (or if deceased, their personal representatives) to apply for a Transitional Tax-Free Amount Certificate (TTFAC) if they can evidence how much tax-free cash has been withdrawn from their pensions prior to 6 April 2024.
It could potentially allow clients to take more tax-free cash than would otherwise be available using HMRC’s standard transitional calculations. The standard transitional calculations are:
Lump Sum Allowance (LSA) – This is an amount equal to 25% of the individuals previously used lifetime allowance (LTA).
Lump Sum and Death Benefit Allowance (LSDBA) – This is an amount equal to the appropriate percentage used, which translates as either:
100% if the individual was entitled to a serious ill health lump sum and they were under 75 at time of payment, OR the individual dies before 6 April 2024 aged under 75 and before that date, a beneficiary is paid a lump sum death benefit.
If neither in scenario (a) applies, the percentage will be 25% of the individual’s previously used LTA.
It is important that you hold complete and accurate records for all tax-free cash that your clients have received prior to 6th April 2024.
Lump sum transitional tax-free amount
The lump sum transitional tax-free amount is the total of the following amounts (if any) that the individual was entitled to prior to 6 April 2024:
Pension commencement lump sums
Uncrystallised funds pension lump sums
Stand-alone lump sums
Any tax-free lump sums taken before 6 April 2006
so far as no income tax charge has arisen in respect of these lump sums.
In addition, if the member had a pension in payment before 6 April 2006, 25% of the amount of the deemed BCE under paragraph 20 Schedule 36 FA 2004 that occurred immediately before the first BCE is included in the lump sum transitional tax-free amount.
HMRC guidance can be found here, and some product providers (e.g. Quilter) have produced a useful calculator which relies upon you inputting complete and accurate information.
British Savings Bonds
NS&I has launched two 3-year British Savings Bonds, as announced in the Spring 2024 Budget. The Guaranteed Growth Bond pays 4.15% gross/AER, and the Guaranteed Income Bond pays 4.07% gross or 4.15% AER. These may be useful for some of your clients as part of a broader portfolio.
Review of firms' treatment of customers in vulnerable circumstances
The FCA has published confirmation that it will review how firms are acting to understand and respond to the needs of customers in vulnerable circumstances, and will share its findings by the end of 2024.
Under the Consumer Duty, firms should act to deliver good outcomes for all consumers, including those with characteristics of vulnerability. The FCA has repeatedly said that how firms treat vulnerable customers will be its litmus test of how embedded the Consumer Duty is within a firm.
Consumer Duty Board Report
Under the Consumer Duty, a firm’s Board or Governing Body is required to conduct an annual review. During this review, they should approve an assessment of whether the firm is delivering good outcomes for its customers in line with the Consumer Duty. The first Consumer Duty Board Reports are due to be presented to Boards or Governing Bodies by 31st July. This is to allow Boards to scrutinise how the firm has embedded the Consumer Duty and the MI to support the report.
Here are ten questions that the Board or Governing Body may use to challenge the report and the MI:
How has your firm’s purpose evolved to ensure good customer outcomes are at the heart of everything your firm does?
How can your firm demonstrate that it has not only implemented the Duty’s requirements, but also that its spirit has been embedded and is understood at all levels of your firm?
How does the report reflect that your staff are empowered and feel safe to challenge and raise issues where they feel the firm might not be acting to deliver good outcomes for customers?
How has your firm defined what good outcomes look like (over the short, medium and long term) for customers using your products/services?
How does the report show that your firm really know its customers and has it used this information to place them into meaningful groups?
Does your firm understand the factors that may impact the outcomes each group of customers may receive?
Are any of these groups experiencing different outcomes and what is driving this?
Is your MI insightful, meaningful and does it allow you to provide effective challenge (or is it merely a case that it tells a ‘good story’ and that everything is ‘working well’)?
What are the gaps, how will these be improved and who is responsible for their delivery?
How does the report clearly show responsibility for addressing these gaps, risks or issues, detail any actions taken, and explain how quickly your firm is acting to improve customer outcomes?
Here are seven headings you may want to consider when preparing the Board Report
1. Executive summary:
brief overview of the Consumer Duty status since implementation;
highlight key achievements, challenges and any significant incidents; and
explain how the business strategy is aligned with its obligations under Principle 12.
2. Culture and purpose:
evidence of the alignment of culture and purpose to the Duty, including factors such as changes to remuneration, rewards and incentive schemes, and Consumer Duty training.
3. Customer outcome monitoring (main section of the report):
summarise business products and services;
consider the customer journey mapping exercises and appropriateness of any outcomes testing; and
outline the general approach to vulnerable customers and how they have been impacted by the Duty.
4. First line oversight:
highlight the key risks/areas of concern identified since the Duty’s implementation and the respective actions taken to mitigate those risks; and
include an action log with a RAG (Red, Amber, Green) rating, root cause analysis, and action owners.
5. Second line oversight:
highlight any second and third-line oversight activities that have been undertaken, as well as any monitoring reviews that have been or are planned to be undertaken; and
overall view of the strength of the risk and compliance (second line of defence) function since the Duty's implementation.
6. Alignment to business strategy:
outline how the business strategy has aligned with the Duty since implementation, and what future changes (if any) are required to remain aligned.
7. Board approval:
The board is required to review the detail contained within the report, and as part of this:
review and approve the report of customer outcomes, including the actions taken;
confirm it is satisfied that the firm is complying with the Duty; and
assess whether the firm’s business strategy complies with the Duty under Principle 12.
In addition to Principle 12, reference should also be made to PRIN 2A, the Consumer Duty chapter in the FCA Handbook. Consider also, who is your firm’s Consumer Duty Champion. Are they sufficiently senior within the firm to provide a credible challenge to the business, if your firm large enough to have appointed a NED, should this person be the Consumer Duty Champion.
Ian Ashleigh
