APPENDIX 4 MEMORANDUM FROM THE FINANCIAL
INFORMATION REQUESTED BY THE TREASURY SELECT COMMITTEE AT THE
HEARING ON 23 JUNE 2004
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
- clarification on commission payments; and
- softing and bundling.
Standardised risk rating system (See Q1973 of
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
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
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
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.
Firms who are not currently time-barring in handling
complaints by policyholders about mortgage endowments
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