The Pensions Regulator

The Pensions Regulator

The Pensions Regulator (TPR) took over from the Occupational Pensions Regulatory Authority (OPRA) with effect from 6 April 2005. The objectives of TPR are to:

  • protect the benefits of members of work-based pension schemes;
  • promote, and to improve understanding of, the good administration of work-based pension schemes;
  • reduce the risk of situations arising which may lead to compensation being payable from the Pension Protection Fund (PPF)
  • maximise employer compliance with employer duties (including the requirement to automatically enrol eligible employees into a qualifying pension provision with a minimum contribution) and with certain employment safeguards.

There is a duty on trustees, managers, administrators, employers and professional advisers to report breaches of law to TPR in writing as soon as reasonably practical. TPR can carry out inspections of premises and ask anyone to furnish information and documentation. Refusal to assist is an offence, as is providing false or misleading information.

TPR can prohibit a person from being a trustee of a pension scheme if that person is in serious or persistent breach of duties, TPR can suspend a trustee if, for example, they are involved in proceedings for an offence involving dishonesty or deception or are the subject of insolvency proceedings. TPR can also appoint a trustee for a scheme if this is necessary to ensure the proper running of the scheme. It can fine any individual up to £5,000, or a company up to £50,000, for a breach of the law. If necessary, it can wind up a scheme to protect its members.

TPR can get a court injunction to prevent any misuse of the assets of an occupational pensions scheme, and can also go to court for an order for restitution of assets for certain breaches of the law. It can require production of any documents from anyone connected with a scheme and appoint an inspector to investigate and question anyone involved with it.

TPR is financed by levies on pension schemes. It aims to be a much more proactive regulator than its predecessor OPRA. It may report a life office or IFA to the FCA if they give misinformation to trustees of a pension scheme or demonstrate a lack of relevant knowledge.

Occupational Pensions Registry

TPR must maintain a register of occupational pension schemes and personal pensions for employees, plus a register of prohibited trustees. The Occupational Pensions Registry is a register of all occupational and personal pension schemes with two or more active members and all stakeholder schemes.

The trustees of each scheme have to register each scheme and pay an annual levy to fund the running costs of the registry. The registry records all details of the scheme which are regularly updated. The object is to enable people who leave service with pension rights to trace their scheme, which can be difficult if they left years ago and the scheme has been terminated, merged or the employer has gone out of business.

Appeals

Appeals against decisions of TPR can be made to the Pensions Regulator Tribunal.

Classes of advisers

Independent advisers

Tied agents of product providers

A provider’s company representative or appointed representative of one marketing group could only give investment advice on that group’s products. The representative’s duty was to select the most appropriate product or service for the client from the range of products offered by the provider they represented. By law, they were forbidden to select products from any other provider, even if they could indisputably prove that the alternative company offered superior products.

However, the adviser was bound to identify situations where they themselves have no product which will meet the client’s needs. If such an area is identified, then the tied agent may introduce the client to an independent financial adviser.

Some tied agents are appointed representatives of a product provider; some are individually authorised firms within the same group as a product provider; others are individually authorised businesses which are not in the same group of companies as the product provider.

Under RDR, tied agents fall into the ‘restricted advice’ category.

Multi-tied agents

Multi-tied agents occupied the middle ground between tied agents and Whole of Market (WoM) advisers. These advisers could arrange ties with a number of product providers, enabling them to offer a wider range of products and providers than a tied agent, but without the need to consider all product providers. The job of a multi-tied agent is to find the most suitable product for the client from the range of providers to which the firm is tied. If a multi-tied agent is tied to just one product provider per product type this may be a relatively easy task. However, if it is tied to more than one provider for a given product type then the selection process would be similar to that for IFAs.

Some multi-tied agents are tied to one producer for each product type they deal in; for example, life office A for term assurance and whole life policies; office B for single premium bonds; unit trust managers C for unit trusts; and life office D for pensions. Other multi-tied agents could be tied to more than one producer for a particular product type.

Under RDR, multi-tied agents fall into the ‘restricted advice’ category.

Whole of Market (WoM) advisers

Unlike ‘tied agents’ WoM advisers were able to select products from any product provider. As a result of this they were generally expected to have a wider awareness and knowledge of the available options than a tied agent of a product provider limited to the products of one insurance company or one unit trust company. In legal terms a WoM adviser was the agent of the client not the product provider and was, therefore, obliged to select not only a suitable product for the client, but also to select a suitable provider for each product.

The choice of product provider would often be made with regard to the price (or premium) for that product. However, the WoM adviser could also take other factors into account where appropriate, e.g. the financial strength of the provider, its investment performance, the quality of its customer service and its administrative ability (including the speed of settling claims). The amount of commission payable should not have been a factor.

As regards the financial strength of the provider, a great deal of work has been done to provide standardised financial reports on each company, but at present it is still very difficult to perform an exact comparison of the relative financial strengths of companies.

It is accepted that some factors may often be capable of subjective analysis only, although various information sources relating to past investment performance should be consulted. While past performance is not necessarily a guide to future investment returns, there is little doubt that the investment management performance of some life offices would leave the recommendation of their products by a WoM adviser requiring more than a little justification.

WoM advisers are required to have professional indemnity insurance and a WoM adviser who is a sole trader (of which there are very few left) must arrange for a locum (i.e. another regulated firm or individual who would be able to complete any unfinished business that was necessary) to deal with clients while they are on holiday.

Under RDR, WoM advisers fall into the ‘restricted advice’ category.

Independent advisers

Prior to RDR, independent advisers were WoM advisers who offered clients the ability to pay by fee only. The use of the term ‘independent’ was restricted by the then regulator, the FSA, to those firms which offered this option; the reasoning behind this restriction was that this would negate any potential commission bias an adviser or a firm may have had. The firm could have offered more than one remuneration option and therefore the retail client could have chosen to pay via commission (rather than by fee) even though the firm was independent. In addition, if the client chose the fee option the firm could receive commission from the provider but this must have been refunded to the client, added to the investment or offset against any fee charged.

So, firms which offered advice from the whole of the market, and offered a fee only option could have called themselves independent financial advisers (IFAs). There were also intermediaries who had access to the whole market, or a whole segment of it, but could not call themselves IFAs because they did not offer customers a fee option. This situation has now changed. The FSA made substantial changes to the retail market, which distinguishes between ‘sales’ and ‘advice’. The rules in the Retail Distribution Review (RDR) include the requirement for independent financial advisers to offer ‘unbiased, unrestricted advice, which is not influenced by product provider influence or remuneration’. These new rules took effect on 31 December 2012.

Responsibilities of regulated firms

Approved persons

Authorised firms are responsible for the conduct of all their employees, agents and ARs. The firm must ensure that those for whom it is responsible (a product provider is not responsible for the acts or omissions of an intermediary) comply with all requirements of the FSMA and the rules made under it. A regulated firm must not use the services of an individual prohibited by the PRA/FCA.

Authorised firms must have systems in place to manage the risks they are subject to. These vary according to the type of business but include the Capital Adequacy rules. Firms have to keep abreast of all relevant changes to the business environment and do their best to reduce and/or control the risks these present. For insurance companies, this includes maintaining an adequate solvency margin and reassurance arrangements. It should be understood, however, that some things are beyond any firm’s control (e.g. tax law changes) and it is not possible for a business to guarantee it will always survive no matter what occurs.

An authorised firm must ensure that all of its individuals carrying out controlled functions are approved. However, in order to cover for illness and holidays, an individual can perform significant influence functions on a temporary basis for up to twelve weeks in a year without approval.

An authorised firm is responsible for any advice given by its representatives. If such advice is in breach of the FSMA or FCA rules, the authorised firm is liable to compensate the client for any loss sustained as a result of the advice. However, the mere fact that an investment has lost value does not give rise to any duty to compensate as this may be due to factors unconnected with the quality of the advice (for example, a stock market crash).

If a firm gives improper advice that will usually be a breach of FCA rules. If the client complains, the firm will have to make appropriate restitution or pay compensation. If they do not, the client could complain to the Financial Ombudsman Service which can force the firm to make restitution or pay compensation. The complaint could also lead to disciplinary action from the FCA, particularly if it was part of a pattern of similar cases rather than an isolated error.

All authorised investment firms will have a nominated Compliance Officer, usually assisted by a Compliance Department, in order to ensure that all the myriad rules are complied with. Larger home finance and general insurance intermediaries are likely to have similar, although neither has a formal compliance officer controlled function yet.

Approved persons and controlled functions

The approved person’s regime is a very important aspect of the regulatory scheme introduced by the FSMA. It is important to remember the following distinction:

  • The authorised person: the business that carries on regulated activities such as providing investment advice. The authorised person could be a company, partnership or sole trader.
  • The approved person: the individual who has been approved to carry out one or more of the controlled functions within the business, either as a senior person or as someone who advises customers on investments.

Individuals undertaking a `controlled function’ within an authorised firm must be individually approved and registered. Controlled functions are those which involve:

  • a significant influence on the conduct of an authorised person’s affairs;
  • dealing with customers in connection with regulated activities; and/or
  • dealing with the property of customers in connection with regulated activities.

You need to be an approved person to perform a significant influence function. The significant influence functions are divided into the following types by the FCA:

  • governing functions;
  • required functions;
  • systems and controls functions;
  • significant management functions;
  • customer dealing function.

The main FCA controlled functions used are:

TypeNo. Function
Governing functions 1Director
 2Non-executive director
 3Chief executive
 4Partner
 5Director of unincorporated association
 6Small friendly society
Required functions 8Apportionment and oversight
 10Compliance oversight
 10ACASS operational oversight
 11Money laundering reporting
 40Benchmark submission
 50Benchmark administration
Systems and controls functions 28Systems and Controls
Significant management functions 29Significant management
Customer dealing function 30Customer

 

The PRA has three controlled function types for its authorised firms:

 

Type No. Function
Governing functions 1Director
 2Non-executive director
 3Chief executive
 4Partner
 5Director of unincorporated association
 6Small friendly society
Required functions 12Actuarial function
 12AWith-profits actuary
 12BLloyd’s actuary
Systems and controls functions 28Systems and Controls

Therefore, individual registration may be necessary, depending upon the type of firm involved, for:

  • directors and chief executives
  • actuaries of insurance companies
  • money laundering reporting officers
  • heads of compliance
  • heads of internal audit
  • senior managers
  • customer investment advisers and traders
  • discretionary investment managers

 

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