T.ONE AU CONTENTS PEER TO PEER LENDING PROTECTION - INCREASING COVER OLDER CLIENTS EU 4TH AML DIRECTIVE FITNESS AND PROPRIETY LEAD GENERATORS

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1 T.ONE ISSUE - ADVISER UPDATE JULY 2017 T.ONE AU CONTENTS PEER TO PEER LENDING PROTECTION - INCREASING COVER OLDER CLIENTS EU 4TH AML DIRECTIVE FITNESS AND PROPRIETY LEAD GENERATORS

2 PEER TO PEER LENDING JULY 2017 PEER TO PEER LENDING Author : John Needham Whilst peer-to-peer lending is FCA regulated it isn t currently a Retail Investment Product, so you don t need to advise on it to be classed as independent. Nor is there any regulatory requirement to undertake any regular CPD to understand why you ve dismissed it. The fact that you can hold it in a regulated tax wrapper such as an ISA, and maybe one day a pension, doesn t change that, although it does mean you might get asked more questions about it. However, if you do choose to advise in this area you must comply with the FCA requirements on suitability and, as with other types of regulated advice, clients will have access to the FOS in the event of an advice related complaint. PI insurers are wary of peer-to-peer lending right now, as it s a niche market with little track record as an advised investment. Peer-to-peer isn t a toxic product per se, but there s a risk that it might be offered as an alternative for cash, selecting the highest rate not the most stable platform, and prompting a wave of complaints if it doesn t go to plan. Generally speaking, people looking at peer-to-peer as an investment aren t moving from equities, they re investing from cash. So whilst we know this is not a substitute for cash from a theoretical perspective, in practical terms its used by people sat on cash, not wanting the risk of equity markets, but looking for a higher return. As the headline is the rate, which looks very much like a (very attractive) cash deposit return and pays out like a cash account, it s hard to divorce our understanding of peer-to-peer lending from cash. A common belief of peer-to-peer as an investment is that it s more risky than cash, but less risky than equities. At best, it appears less volatile and for many people volatility equates to risk. However, risk to capital could be considerable, and Lord Adair Turner has already warned of irresponsible lending in anticipation of huge losses amongst peer-to-peer lenders, suggesting that in time they will make the worst excesses of investment bankers seem tame. Andrew Bailey, FCA CEO, also expressed concerns around this new market. These names are hard to ignore. Page 1 cont d

3 PEER TO PEER LENDING JULY 2017 PEER TO PEER LENDING A common belief of peer-to-peer as an investment is that it s more risky than cash, but less risky than equities. At best, it appears less volatile and for many people volatility equates to risk. However, risk to capital could be considerable, and Lord Adair Turner has already warned of irresponsible lending in anticipation of huge losses amongst peer-to-peer lenders, suggesting that in time they will make the worst excesses of investment bankers seem tame. Andrew Bailey, FCA CEO, also expressed concerns around this new market. These names are hard to ignore. If you do decide to advise in this area we believe it s sensible to adopt an approach where only a small percentage of a client s assets are invested (an amount they can demonstrably afford to lose) and this should not have a detrimental impact on the amount of short term cash they require. Fundamentally, there can only be a finite number of people in the UK needing to borrow, who have a good enough credit rating to be a reasonably safe bet, but not good enough for a bank to lend to. Either the market must cap itself at a certain level, or accept more risk to keep growing. It is also worthwhile checking whether the money invested is pooled or loaned on a one-to-one basis. If pooled it may appear lower risk but could be classified as a Non-Mainstream Pooled Investment (NMPI), which would bring it under the very strict rules for this and UCIS investments. At this stage, we believe it is advisable to take a very cautious approach to this market generally. Please contact the Technical Team in Andoversford if you are considering this type of investment. Page 2

4 PROTECTION - INCREASING COVER JULY 2017 PROTECTION - INCREASING COVER Author : Robert Dinwoodie When recommending a protection policy it can be difficult to calculate what the sum assured should be. If the calculation is based on what the client s family would need if the client had died yesterday, then that figure might be out of date next year. To assist you, most companies offer the option to have the benefit increasing each year by the Retail Prices Index, or a fixed amount. However when recommending this type of cover you need to make the client aware how the premium will increase, as only LV=, in the table below, increases their premium by the same percentage as the cover. This may also influence which company you recommend, as the premiums on a cheaper policy may quickly exceed those on a plan with lower or no multiplier. Company Benefit Increases Premium Increases Max or minimum Aegon multiplied by 1.5 0% to 10% AIG 5% Premium increase depends on client s age and the remaining term Aviva Fixed or Cover change multiplied by 1.5 Max 10% Legal & General multiplied by 1.5 Max 15% LV= Royal London Fixed or Premium increase depends on client s age and the remaining term Scottish Widows multiplied by 1.4 2% to 10% The increasing cover and the premium calculations should be explained to the client in the Suitability Report. cont d

5 OLDER CLIENTS JULY 2017 OLDER CLIENTS Author : Robert Dinwoodie We have discussed previously that extra consideration needs to be given when advising clients that may be deemed vulnerable, i.e. asking if they would want anyone else present in the meetings, or copied in on the letter of recommendation. However, what other considerations need to be given when dealing with older clients? Some companies do not permit investments for clients over a certain age and some restrict how much of a client s investable wealth should be invested in funds, rather than deposit-based investments. Tavistock does not currently provide any specific guidance in this area. When we are investing for any client we need to be able to demonstrate that the investment is to be held for a reasonable length of time. For older clients this is harder, as their mortality is a larger concern. We are not trying to stop older clients investing, however unfortunately when some beneficiaries receive a legacy they are disappointed if there is an exit charge, or they feel that the investor has paid any charges that has reduced their legacy, especially if those charges were incurred not long before death. These potential complaints can be avoided if the client s family are involved in the advice process, so that they understand why the investment is being recommended and can, where appropriate, agree that they may receive their legacy as an investment. Understandably, some clients may not want to involve their family in the advice process, as they might not want their potential beneficiaries to know what they are going to get (or not get). In this case, rather than them being present, the client should be advised to explain to the beneficiaries in their Will, that they could receive the investments as part of their legacy. This should also be documented in your Suitability Report.When we are investing for any client we need to be able to demonstrate that the investment is to be held for a reasonable length of time. For clients in their 90s we feel you should go one step further and ask the client to confirm that the beneficiaries are aware of the investment and confirm this in the Suitability Report. We are not expecting to see a signed guarantee from the potential beneficiaries that they will keep an investment, it is more that they know their options, if they choose to surrender an investment that they have inherited in the first few years of inception, that is their choice, however it will make a complaint less likely.

6 EU 4TH AML DIRECTIVE JULY 2017 EU 4TH AML DIRECTIVE Author : John Needham What you need to know The EU 4th Money Laundering Directive (4MLD) came into effect on 26th June Our Guide to Anti Money Laundering has been updated to reflect the changes. This is held on the document library and can be made available on request. As we know, the UK will continue to follow EU regulations for as long as we remain a member of the EU. The FCA has confirmed it will keep all proposals and policies under review to take account of changes needed around the UK s exit from the EU. The changes under the 4MLD are not considered too onerous as UK regulations already require firms to undertake risk assessments in relation to financial crime and money laundering and that these are kept under review. The main areas of the regulations relevant to our businesses are as follows: Client due diligence (CDD) on existing clients: more clarification is provided in relation to when CDD should be applied to existing clients. We don t envisage this being a big change as our current practice is to undertake further checks on existing clients where there has been a change in their circumstances. Simplified due diligence (SDD): the automatic right for firms to carry out simplified due diligence where the client or product falls within certain categories is to be removed. Instead, SDD may only be applied provided you first establish that the business relationship or the transaction presents a lower degree of risk of money laundering occurring. Politically exposed persons (PEPs): the definition of a PEP is widened to include persons holding prominent positions in the UK. It is also confirmed that family members and close associates of PEPs are not themselves PEPs, but should still be subject to some enhanced due diligence (EDD). This does not change our current stance where we have referred to UK PEPs as High Risk Customers. Written risk assessments: We must take appropriate steps to identify and assess the risks of money laundering and terrorist financing and document these and keep them up-to-date. Electronic verification systems: guidance for firms on areas to consider when selecting an electronic verification system. We already recommend CreditSafe who are fully compliant with the new rules. Register of beneficial owners: this links to Companies House - People with Significant Control (PSC) requirements, under which certain companies and limited liability partnerships (LLPs) are required to maintain details on PSCs over their business. This data is provided to Companies House annually and is as part of its company information search facility. We are not expecting to see a signed guarantee from the potential beneficiaries that they will keep an investment, it is more that they know their options, if they choose to surrender an investment that they have inherited in the first few years of inception, that is their choice, however it will make a complaint less likely.

7 FITNESS AND PROPRIETY JULY 2017 FITNESS AND PROPRIETY Author : Michael Walker The FCA expects us to closely supervise our Appointed Representatives and Registered Individuals and as the FCA operates a principles based regulatory regime, it is imperative that our interpretation of their requirements provides for a sufficiently robust approach to assessing financial solvency. Every year we ask our members to complete a fitness and propriety questionnaire so we can ascertain whether you as individuals are considered fit and proper to perform certain functions within our network. We look to determine an adviser s fitness and propriety by assessing honesty, integrity and reputation, competence and capability, and financial soundness. As part of financial soundness, we will be asking all advisers to complete this questionnaire. It should not take too long to complete. In addition to completion of the questionnaire we ask that you provide the network with a current copy of your Experian Credit report. This must have been produced in the last 30 days. Members who have signed up to Experian will be able to send us a report for free, however members who are not signed up to Experian, a statutory credit report will be fine, this costing only 2. Please note only a report produced by Experian will be acceptable. We will not accept any other providers of credit reports. A message will appear on your Noticeboard (Phossil) asking you to complete the fitness and propriety questionnaire. Please ensure you complete this and provide us with a copy of your Experian credit report by no later than 28th July. Failure to complete these actions by 28th July, may result in further action being taken. Please note this is also applicable to non-advising Directors / Partners as well as all mortgage, protection and financial advisers

8 LEAD GENERATORS JULY 2017 LEAD GENERATORS Author : Michael Walker Lead generators are one method of getting inquiries from potential customers. Many advisers are now using lead generators in helping them make new appointments with new prospects. We have seen over the last couple of years an increase in the number of advisers using this method to gain new clients. Using lead generators enables firms to: Be introduced to perspective new clients Determine pricing on a per lead basis Choose the service they wish to offer prospects Select the geographical area that the business is interested in Pay for only the lead they receive When appointing a lead generator please undertake your own due diligence and complete the due diligence form that can be found in the document library: The guide to Due Diligence on Introducers & Lead Providers. It has been brought to our attention that one firm who say they will provide you with a stream of appointments, and guarantees the prospects will be there waiting to meet you, has been asking for blank copies of firms business stationery to send out a letter to a prospect confirming the appointment. Under no circumstances should you ever allow any firms or individuals to use your letterhead who is not an employee of your own firm. If any firm, or lead generator asks for copies, please do not provide them with it. Anyone found to be providing blank copies of their business stationery may be opening up their firm to fraudulent activity and we may have to consider additional supervision of your firm. If you have any questions regarding lead generators or the article, please contact Internal Compliance on ext. 488 or internal.compliance@tavistockinvestmentsplc.com