Styperson POPE

Strategy & Compliance for Investment Firms


How are Funeral Plan Providers Regulated?

One relatively unknown corner of legislation is how providers of funeral plans are regulated under the financial services and markets act (FSMA)…

From a regulatory point of view, there are three types of provider:

1. FSA Authorised Providers
Because of the ready availability of exemptions to the Regulated Activities Order (RAO) which defines the requirement for FSA authorisation, no funeral plan providers have opted for full regulation.  Nonetheless, the starting point for the exemptions is the regulated activity of…

”Entering as provider into a funeral plan contract… under which a person (“the customer”) makes one or more payments to another person (“the provider”); and the provider undertakes to provide, or secure that another person provides, a funeral in the United Kingdom for the customer (or some other person who is living at the date when the contract is entered into) on his death”

2. Plans Secured Against a Contract of Insurance
If the money paid by the customer is used to purchase insurance cover which provides for funeral expenses, the provider of this product is exempt from requiring authorisation as a funeral provider (however, they may well require authorisation as an insurance intermediary).

3. Plans Which Hold Money in Trust
These are by far the most common type of funeral plan but they are also have the most complicated exemption for their providers to avoid having to be FSA authorised.  There are five separate tests which must each be met for the use of this exemption.  They cover:

i) the form of the trust;
ii) the eligibility of the trustees;
iii) the management of the trust’s funds;
iv) the accounting for the trust; and
v) the valuation of the trust.

Providers will also need to consider the Money Laundering Regulations as they apply to trusts and trust and company service providers.

If you’re a provider of funeral plans and would like to ensure you manage your activities to fit within one of these exemptions, do please contact Simon Webber, StypersonPOPE’s MD, on 07710 260 717 or sw@strategic-compliance.co.uk.

If you’re interested in purchasing a funeral plan, this post probably hasn’t been very helpful, but you might want to read this advice from the FSA.


Preparing & Verifying Financial Promotions

Writing and approving financial promotions is an extremely important part of any authorised firm’s work, whether they contain information on clients or on the firm’s own services. The FSA lay down detailed rules about financial promotions and the circumstances in which it is necessary to produce a formal prospectus.  For an ordinary (non-prospectus) financial promotion, the most far reaching necessity is that it must be “clear, fair and not misleading”.

The quality and accuracy of information contained in financial promotions is a key part of the commitment every firm must make to “treating customers fairly”. Creating this ‘firm-wide culture’ remains an important focus for the FSA.

Unregulated Collective Investment Schemes
Often, Operators of unregulated collective investment schemes will bolt on their standard regulatory wording (sometimes making the mistake of thinking this acts as a ‘disclaimer’) but it is just as important to ensure that the document as a whole contains the relevant details, presented in the right way and that the process of verification has been appropriately thorough,

This is the weak point for many Operators because it is their responsibility as an authorised firm and if a scheme fails to perform in the way the information memorandum or promotional flyers suggest it will, it is these financial promotions that investors (and their litigiously-minded lawyers) will turn to first.

Corporate Finance
For company fundraisings, documents tend to be less focussed on future performance but to have more information on a company’s track record and the attributes of the current management, product and market. These statements of fact must be examined carefully and whilst firms might want to ask companies to warrant the accuracy of the information the provide or indemnify the firm against the effects of misleading information being given, firms must not use these to replace a critical examination and verification of the information they are providing to potential investors.

Unauthorised Firms
There are a number of unauthorised firms operating within exemptions to the regulated activity order and this means that the FSA’s rules on the preparation of financial promotions do not apply to them (although, of course, the laws and orders regarding the communication of financial promotions still do). These firms must consider the common law implications of giving misleading information which have much the same effect as the higher-level rules from the FSA.

Verifying Financial Promotions
If your firm’s name appears on the document, don’t think that a general disclaimer of responsibility is going to protect you from the consequences of inaccurate information or an inadequate process of verification. Of course, firms can only go so far and it is impossible to be absolutely certain that every thought within the IM (which will often be an opinion or a forecast) is accurate. Firms must however take all the steps they reasonably can to substantiate the material facts, ensure that the opinions are honestly held, and check that the forecasts are not misleading.

Should the worst come to the worst, it is the robustness and thoroughness of this verification process which will protect the firm and its Directors from litigation.

StypersonPOPE has considerable experience of preparing, examining and challenging financial promotions (and, unfortunately, in examining promotions made by others which are coming under attack from lawyers). If you would like to discuss the preparation or verification of financial promotions, please call or e-mail Simon Webber, StypersonPOPE‘s Managing Director.


Raising Funds under Prospectus Directive Exemptions

The Prospectus Directive is EU legislation requiring companies and funds structured as unregulated collective investment schemes to prepare a prospectus when they offer transferable securities to the public (raise money!). Within the UK, the prospectus directive has been made law through certain sections of the Financial Services & Markets Act, through Treasury Orders, and through the FSA’s ‘Prospectus Rules’. These lay out the circumstances in which a prospectus is needed and also define what it must contain.

The advantage of preparing a prospectus is that it can be used across European countries with relatively few alterations. The disadvantages are that it is time consuming and expensive to create a prospectus, it is likely to involve professional advisors, and it must be approved by the FSA. For most smaller companies and funds looking to raise money, a full prospectus is an unnecessary complication. For this reason, there are various exemptions to the prospectus rules and so the requirement to prepare a prospectus does not apply to (among other things):

1. “open-ended” funds;
2. funds or companies raising less than €2,500,000 or equivalent;
3. funds or companies using a minimum total consideration per investor of €50,000; or
4. funds or companies issuing fewer than 100 offers (per EEA member state)

Less than €2,500,000
If the fundraising is for less than €2.5m, it is exempt from the requirement to prepare a prospectus, however the fundraising total must include any other amounts raised in the preceeding 12 months. For example, if a fund or company is looking to raise €2m having raised €1m six months earlier, it is unlikely that they can rely on this exemption.

Minimum Investment of €50k
If the fund or company will not accept an investment of less than €50k from any investor, it is exempt from the requirement to prepare a prospectus. It will be necessary to ensure that this lower limit is not breached because that would mean that the entire fundraising would become subject to the prospectus rules and the issuer of the security, along with the person who makes the offer on their behalf will be responsible for providing a satisfactory prospectus.

Restricted to fewer than 100 offers
If fewer than 100 potential investors receive an offer, the fund or company is exempt from the requirement to prepare a prospectus. It is not relevant from whom the approach comes, whether directly from the company or through any other route and it is the total number of end recipients which must be counted.

Investors can be excluded from the total if, at the time of the approach, they were a Qualified Investor registered with the FSA, an authorised person, or a High Net Worth Company (as defined by the FSA and EU rules).

Other Vehicles
It should be noted that the the Prospectus Rules apply to closed-ended funds and certain other vehicles like partnerships and companies. If another vehicle is used, different rules may apply. For instance, a open-ended fund is likely to fall outside the Prospectus Directive but will still be governed by the rules applying to Unregulated Collective Investment Schemes, Financial Promotions and Regulated Activity.

With experience of the prospectus directive within both corporate finance and fund establishment, StypersonPOPE can help you plan which exemptions to use. For an initial discussion, please call or e-mail Simon Webber, StypersonPOPE‘s Managing Director.


What is an EIS fund and how is it regulated?

What is an EIS fund?
The short answer is that it’s an arrangement through which less experienced and time-poor investors can put money into Enterprise Investment Scheme qualifying unquoted companies. This offers investors diversification in their portfolios and the higher level of risk is mitigated (to an extent) by the income and capital gains tax reliefs. (See the HMRC site for more detail on Enterprise Investment Scheme tax advantages and qualifying investments.)

When looking at the tax reliefs, there are two types of EIS fund; approved and unapproved.  These are not regulatory terms but refer to whether the fund has been approved by HMRC.  If it has, the investors qualify for relief when they invest in the fund, if it is not, they only qualify for relief when the fund makes an eligible investment.  The predictability of the former makes it attractive to some investors but they are less flexible than unapproved funds and have a limited time in which to make their investments.

When it comes to the structure of the fund it gets more complicated. Firstly it isn’t really a ‘fund’ at all. Unlike companies and other kinds of funds (which are usually partnerships) it doesn’t have a legal personality. It can be a number of parallel investment management agreements between individual investors and the manager of the ‘fund’ or a series of separate portfolios which together are referred to as the ‘fund’.

Typically, the initial investment is kept in cash as ‘client money’ either with the scheme manager, in a client account, or on trust with a bank. The investment manager will then commit a portion of each investor’s cash into each investment in a qualifying company (in line with the investment management agreement). Often the resulting shares will be registered in the name of a nominee and shareholder duties (like voting) will be delegated to the investment manager during the life of the fund.

If that sounds rather like a collective investment scheme, we can understand why.  However, the Treasury have the power under FSMA to create exemptions to the definition of a collective investment scheme and they have created one specific to EIS funds.

A Compliance Perspective
From this point of view as well, EIS funds are strange animals. The fact that an EIS fund is not a collective investment scheme (CIS) has its advantages and disadvantages. On the one hand, they do not require an operator in the same way as a CIS, the scheme documents are not as prescribed, and the promotion is not as restricted (at least for an authorised firm). On the other hand, unlike a CIS, it is ‘MiFID business’ which means that firms managing an EIS fund will need to follow rules from which CIS operators are exempt. It also means that unlike a CIS, it is virtually impossible to run an EIS fund without the permission to deal with retail clients.

Retail client permissions are necessary because it is the underlying investor, not the fund which is the client of the firm. Within the MiFID rules under which EIS funds are regulated, it is much harder to categorise an investor as professional. You may find that if retail investors are excluded, it seriously limits the market for the fund.

The regulated activities involved in managing an EIS fund include holding client money, investment management, and safeguarding and administering investments. Firms should also consider whether any particular investment management agrement is likely to involve them in arranging, advising, or dealing in investments.  It is possible for firms to outsource some of these activities if they do not have the required permissions to carry them out themselves.

Simon Webber, StypersonPOPE‘s Managing Director has experience of both investment management and unquoted corporate finance compliance. If you would like to discuss any aspect of establishing or managing an Enterprise Investment Scheme fund, please contact him directly on 07710 260 717 or sw@strategic-compliance.co.uk.

 

 


Promotion of Unregulated Collective Investment Schemes

As with most types of financial services, people who are not authorised and regulated by the FSA are very restricted in how they can promote an unregulated collective investment scheme.  Unusually even regulated firms are subject to tight restrictions.  The Financial Services and Markets Act 2000 (let’s just call it FSMA), makes it an offence for anyone to promote a scheme to the public:

“An authorised person must not communicate an invitation or inducement to participate in a collective investment scheme.”

Fortunately, for regulated firms, there are a few exemptions, one set is created by Treasury Order and the other by the FSA.

Treasury Exemptions
If an investor falls into one of the categories below, a fund can be promoted to them but the promoter must ensure that the investor falls into the category before making a promotion:

  • Investment Professionals (authorised firms and investment companies);
  • Sophisticated Investors with a certificate signed by an authorised firm covering unregulated schemes; and

  • High Net Worth Companies and Unincorporated Associations.

For some schemes that invest in unlisted securities, authorised firms can also invite High Net Worth Individuals and Sophisticated Investors to self-certify.

FSA Rules
These allow a scheme to be promoted to investors who have undergone an assessment by an authorised firm, including:

  • individuals for whom the scheme has been assessed as suitable (usually by a financial advisor); and

  • individuals for whom an assessment of experience, expertise and knowledge has been undertaken (sometimes by a financial advisor or the scheme’s Operator).

In these cases, a fund can be promoted to a potential investor on the basis that they will be prevented from investing unless they successfully complete the assessment (which may occur after the promotion has been made).

Whichever exemption the investors fall into, the documents for the scheme must meet detailed requirements laid down by FSMA, the Treasury and the FSA. These include presenting a balance of risk and reward, carrying appropriate warnings, giving sufficient information, and always being clear, fair and not misleading.  Summary documents can be used but these also have to meet the rules and must be consistent with all of the other information given to investors.

In most cases, an FSA authorised firm can approve the scheme documents and summaries for distribution by an unauthorised person but only to the relevant categories of exempt investor.  To rely on the FSA’s exemptions, careful procedures will need to be followed by the authorised firms (see our Services For Operators).

If you would like to discuss your plans to market an unregulated collective investment scheme, please contact Simon Webber, StypersonPOPE’s Managing Director, on 07710 260 717 or sw@strategic-compliance.co.uk.

 

 


Data Security in Authorised Firms

In 2008, the FSA made “Data Security” one of their priorities and although they do not lay down rules specific to data security, they expect authorised firms to take it extremely seriously as part of their commitment to establishing effective management systems and controls, and their obligation to treat customers fairly.

The risk of damage to a firm’s reputation and the cost of dealing with lost or stolen client information is bad enough but worse still is the danger that clients may be exposed to identity theft. Even small financial services firms which hold limited data on clients can be targeted by organised criminals or casual opportunists. The greatest threat often comes from the firm’s own staff; database encryption and secure servers are pointless if somebody can take client information away from the office on a CD or accidentally leave their laptop on a train.

The first step in establishing data security, is a performing a risk assessment specific to your business. The advice from the FSA is that:

“If firms think their in-house resources or expertise are inadequate to perform an effective risk assessment, they should consider seeking external guidance.”

Once completed, the risk assessment becomes the foundations on which proper policies and business-specific procedures can be built.

“We were not convinced by firms that claimed to have detailed data security rules but were unable to produce written policies and procedures”

Of course written policies are pointless if staff are not appropriately trained in their use. Because many people wrongly assume that data security is common sense (and because, let’s face it, it’s not a subject naturally dripping with drama), it is important to be creative.

“Our experience shows that many instances of data loss occur because staff do not know or understand relevant policies and procedures.”

Of course, we hope that risk assessments, appropriate procedures and effective training will prevent data loss or theft but if the worst happens, firms must decide how to react and this will probably involve advising those affected, something which must be done carefully but swiftly.

“Firms should consider telling affected consumers exactly what data has been lost, give them an assessment of the risk and give advice and assistance to consumers at a heightened risk of identity fraud.”

For a business-specific risk assessment, help creating suitable procedures, and some effective training on data security, do please give us a call or send us an e-mail.


Working In A Regulated Environment

“The rain, it raineth on the just and also on the unjust fella;
but chiefly on the just, because the unjust steals the just’s umbrella.”
Sam Ervin – US Senator 1954 – 1974 

It would undoubtedly be easier to make money if we chose not to follow the increasing number of regulations to which we are subject.  After all, it’s probably more profitable to rob a bank than to run one.

However, as we offer compliance advice (as opposed to non-compliance advice) we feel the real trick is knowing how to make the most of what can be acheived within the regulations. 

It’s vital not to see the compliance function as a brake on enterprise; it must be a partner in the firm’s strategic development; if it’s not, then you need to review your compliance function urgently.

If you would like to discuss any aspects of strategic compliance advice, please call or e-mail us.