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.


Interim Compliance Officer & Part Time Director

Simon Webber is a portfolio Head of Compliance, Board Director and Consultant to FSA-regulated investment firms.  He is approved by the Financial Services Authority as a Compliance Officer, Money Laundering Reporting Officer and Director.

Simon specialises in assisting corporate finance houses, business angel networks, and companies structuring, launching and managing alternative asset funds, unregulated collective investment schemes and EIS funds.

Often he focusses on turning around the compliance function or integrating it more effectively with the rest of the business, making it more strategic and less obstructive.  This often requires an involvement with strategy and culture as well as business processes, FSA relationship management, and staff development.

As well as running StypersonPOPE, Simon is currently a Director of businesses in both London and Manchester including a market-leading alternative investment fund manager, a start up funds market, a corporate finance and early-stage investment house, and a Non-Executive Director placement service.

He holds two undergraduate degrees with honours and a masters degree.  He is a founder member of a regional committee for the Institute of Directors and is proud to be a Director of a charity giving over £6m per year to community projects.

If you would like to speak to Simon, please contact him on +44 (0) 7710 260 717 or sw@strategic-compliance.co.uk.

(Or take a look at linkedin.com/in/simonwebber and
twitter.com/stcwebber if you prefer.)


Structuring Funds: Unregulated Collective Investment Schemes

This isn’t intended to be comprehensive but it hopefully introduces some of the terminology for those who are unfamiliar.  Most fund vehicle types link to Wikipedia articles which open in a new window.

Partnerships
Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) are popular UK structures for funds because they are ‘tax transparent’, meaning that they will pay no tax themselves and each of the investors (partners) will be responsible for their own tax. This is particularly attractive to investors who don’t pay UK tax – this applies to SIPP and SSAS pension trusts and investors based outside the UK.

Limited Partners / General Partners / Designated Members
There is likely to be a mix of passive and active members. Investors will be passive (Limited Partners) but the people running the fund will be active (a General Partner in an LP, or at least two Designated Members in an LLP). These active partners may also be called the ‘Sponsor’ and will be responsible for the running of the fund which may include calling investor meetings, paying the partnerships’ bills, making investment decisions, or agreeing contracts to outsource these and other duties. Typically, this role is played by an existing company or a special purpose vehicle (SPV) run by whoever initiates the fund – the people with the bright idea!  They may also have a carried interest vehicle which provides them with a tax-effective way to benefit from the success of the fund.

If all of the investors are in day-to-day control of their property (their investment) then the fund may be a ‘syndicate’ (and not really a fund at all) but these are extremely difficult to design and manage for more than a small handful of investors. If any investor is not in day-to-day control of their property it is likely that the fund will constitute a Collective Investment Scheme under UK law. As this is the case for the vast majority of funds, lets assume it’s the case here…

Operator
Any person setting up or operating a fund run from the UK (even where the partnership is established off shore but actually managed by people based in the UK), must be authorised by the FSA to establish, operate and wind up a collective investment scheme. If the people behind the fund are not already an authorised person with the appropriate permissions, then it’s likely that they will require the services of an ‘operator’. The operator will ensure compliance with regulatory requirements, will ensure appropriate information is provided to investors, and can play an important role in aiding the promotion the fund (there’s more detail on this last point, in our article “Three Routes To Promote a Collective Investment Scheme”).

Companies
Some people thinking about establishing a fund, consider structuring it as a limited company in order to avoid the need for an operator (incorporated bodies are excluded from the definition of a collective investment scheme unless they qualify as Open Ended Investment Companies – OEICs) but this is unlikely to be attractive if the fund is larger than about £1m because the cost of an operator will work out less than the amount of corporation tax that the fund would pay. The FSA also places restrictions on the way in which a company’s shares can be sold to investors which, although different, are no less onerous than those on collective investment scheme units and would usually require the assistance of professionals adding further costs.

Feeder Funds & EPUTS
There are a variety of reasons why feeder funds may be used but the most common are to provide:

  • a UK entity through which UK investors can put money into offshore funds;
  • an offshore entity through which non-UK investors can invest in UK funds; or
  • an EPUT through which UK capital gains tax exempt investors can invest.

The reasons for establishing such a fund are usually driven by tax advantages such as ensuring that the upside of investments is taxed as a capital gain rather than income or ensuring that capital gains tax exempt investors, such as SIPP and SSAS pension schemes, do not pay tax at all. ‘EPUT’ stands for Exempt Property Unit Trust and, like other feeder funds, will usually be one of the Limited Partners in the underlying fund. If run from the UK, it is likely that the feeder fund will also be a Collective Investment Scheme and will therefore require an authorised operator.

Unregulated vs. Authorised
This is where the terminology begins to get confusing. All Collective Investment Schemes run from the UK, require the involvement of an authorised operator or manager however, within this, there are two types of scheme; unregulated and authorised. These terms refer to the scheme itself (not the operator). ‘Unregulated’ can also be misleading because they are heavily regulated and very restricted in how they can be promoted.

Authorised funds must apply to the FSA for their authorisation and this can be very costly (for most funds, it is prohibitively so) and can take up to six months from application to authorisation. In addition, authorised funds need to follow rules allowing investors to leave the fund which can make it difficult for such schemes to invest in illiquid ‘alternative assets’ like property, art, wine, films, and shares in unquoted companies. For these reasons, most funds are structured as unregulated collective investment schemes.

StypersonPOPE specialises in assisting anyone involved in establishing or running unregulated collective investment schemes whether as General Partner, Sponsor, or Operator. If you would like to know more about our services, please contact Simon Webber, StypersonPOPE’s MD, on 07710 260 717 or sw@strategic-compliance.co.uk.


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.

 

 


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.


Anti-Money Laundering

All FSA-authorised firms are required to ensure that their businesses are not used to facilitate financial crime.  Since December 2007, many unregulated companies have joined them, becoming responsible to other regulators including HMRC and the Office of Fair Trading (OFT).

The Joint Money Laundering Steering Group (JMLSG), part of the British Bankers’ Association (BBA), has devised rules for all of these businesses to follow in their anti-money laundering efforts.  Because of our familiarity with these rules, we can prepare appropriate procedures based on your business’ exposure to the risk of financial crime.  We can tailor these to fit your existing business processes and ensure that they are easily understood, implemented and overseen.

We are able to offer the services of an FSA and HMRC-approved Money Laundering Reporting Officer who can oversee the processes we implement and report to your Board, SOCA or you relevant authority as required. 

If you would like to discuss any aspects of money laundering reporting, please call or e-mail Simon Webber, our Managing Director.