Select Committee on Treasury Eighth Special Report



1.  When we gave evidence to the Committee on 23 June, we undertook to provide further information in a number of areas. This memorandum covers:

  • standardised risk rating systems;
  • information on companies that are not time barring complaints;
  • clarification on commission payments; and
  • softing and bundling.

Standardised risk rating system (See Q1973 of HC 71-II)

2.  We gave the Committee a commitment that we would work with the industry to see if a standardised risk rating system would be viable. As part of our wider review of the information received by consumers (CP 170: "Informing consumers: Product disclosure at the point of sale") we will consider whether there is a practical and consumer-friendly form of standardised risk indicator which can be adopted. We publicised this intention on 5 July in our press release about the review of projection rates.

Time barring mortgage endowment complaints (See Qq1937-1939 of HC 71-II)

3.  In evidence to the Committee Callum McCarthy said that 13 out of 20 major firms were not, at that point, relying on time bars to reject complaints. The Committee asked us to provide the names of firms who are not time barring mortgage endowment complaints.

As at 20 July 2004 there are 13 firms who are not currently relying on time bars to reject mortgage endowment complaints. 9 of the 13 firms have given us permission to disclose their name to the Committee for publication and a list of these firms is attached at Annex A.

Of the other seven, some are applying time bars selectively, in that they are considering the broader circumstances of the complaint before deciding whether or not to use limitation to reject the complaint. One firm, for example, has said that it will judge mortgage endowment complaints on a case-by-case basis and not reject complaints on time barring grounds alone.

Clarification on commission payments (See Q2023 of HC 71-II)

4.  The Committee asked if clients were guaranteed to get all commission rebated to them if they opted to pay a fee for advice from an intermediary under the new depolarised arrangements. The position is that the client is guaranteed to get the value of all commissions but there are some technical restrictions that would prohibit certain arrangements (such as refunding commission to a client in cash in respect of a pension contract subject to tax relief - this would contravene Inland Revenue requirements).

5.  The draft rules on which we have consulted require the firm to ensure that the transfer of the value of the commission occurs by one or more of:

  • reducing the amount of the fee by the amount of commission received;
  • increasing the client's investment amount; or
  • refunding the amount of the commission directly.

6.  In addition, we proposed a provision to deal with the difficulty that renewal or trail commission can often not be reinvested for a client's benefit, and where the practical difficulties and costs of reconciling would probably outweigh the net potential benefits to clients. So a firm may retain an amount of trail or renewal commission when acting on fee terms, but only up to an annual amount specified in the fee agreement.

7.  The Committee also asked about trail commission if a client severs all links with an IFA. There is no automatic cessation of the trail commission in these circumstances. However, where a client asks a new IFA to take on responsibility for oversight of an existing portfolio carrying trail commission that would otherwise continue to the originating IFA, it is standard market practice for a request to transfer the trail commission entitlement to the new IFA to be granted.

Softing and Bundling (See Qq 2070-2071 of HC 71-II)

8.  Our work on soft commission and bundled brokerage practices has been driven by our concern to promote transparency and accountability. Both these practices involve fund managers using their clients' funds to generate a flow of goods and services to the fund manager and so generate conflicts of interest for the fund manager. We believe it is important that clients understand what they are paying for. Armed with that information, clients can use their bargaining power to enforce change where that is necessary.

9.  In our recent policy statement (Policy Statement 04/13), we said that we intend to restrict softing and bundling to the provision of investment research and execution. During the past year or two, some firms have developed innovative solutions to this issue, putting the investor in a stronger position to establish value for money from the fund management service. We have said we want to see market wide solutions and we expect the industry to develop a workable and effective disclosure framework by the end of this year. If not then the FSA will consider what further regulatory action is necessary.

10.  We must now define the scope for the new regime. What should "execution" and "investment research" mean for this purpose? To help us decide, we are arranging meetings with representative interested parties. We shall in due course need to consult formally and publicly when all firms and consumers will have an opportunity to comment.

11.  We understand that some of the firms who currently provide or obtain goods and services through softing and bundling arrangements may need to change the way they do business. Our work is, however, concerned with the manner in which goods and services are paid for. If a particular good or service is valuable to fund managers, we believe that they will pay for it.

Annex A

Firms who are not currently time-barring in handling complaints by policyholders about mortgage endowments[5]

Aviva; Barclays; CIS; Legal & General; Nationwide; Prudential; Royal London; Standard Life; and Zurich

Four further firms are not currently time-barring but have not given the FSA consent to disclose their names.

Financial Services Authority
20 July 2004

5   As at 20 July 2004 Back

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