Member Update 15th February 2019
Written on 15/02/2019


Which of the following options will always be offered in a money purchase pension arrangement?

a) An uncrystallised Fund Pension Lump sum

b) A Drawdown pension

c) A Scheme pension

d) A lifetime annuity

Answer is d) A life time annuity

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What to expect in 2019

BAT updates: With reference to SMCR  SR reports have now been updated with Mifid II updates to state the ongoing fee disclosure charges that have caused such a stir.  The endless disclosure is a worry, but mainly because markets are historically flat.  has been flat out this week with the firms whose year end is 31st January.  This creates another deadline of “six weeks after the year end” deadline for Gabriel Returns.  All now safely gathered in – like that harvest festival hymn in the local church, except this time it’s for retail financial services. 

Tavistock profit warning.  Fresh from selling my final shares in Tavistock two weeks ago, after the sale of FINANCIAL Ltd to them in 2014, and finally frustrated by their progress,   Charlie was stunned to see they issued what amounts to a profit warning.  Yesterday 14th February 2019.  For the first time in my life my timing was impeccable, as the share price fell.  

Defaqto’s independence?  It costs £20k for a fund house to allow themselves to be researched by Defaqto.  And there’s the IFA industry paying them for the research!   A classic case of conflict of interest.  It is something that should be disclosed on Defaqto reports, as a covering memo to the client - that some who don’t make it onto their panels don’t do so because they haven’t “paid to play”.  Shame on Defaqto, but their competitor Morningstar – who have altogether higher standards, are significantly more expensive. 

Local family moving to Holland for work have been told that their UK driving licences will NOT be valid post March 29th 2019. you can see a whole industry of people make money from this sort of bureaucracy.

Quick solutions on banking….

given the perennial problem of opening a bank account. but the interesting thing is that the company only has a licence for an e-money account.  This is relatively straightforward and can be achieved within a year for most people and firms who are reasonably experienced and intelligent and motivated.  Their capital requirements are also basic solvency – even easier than for an IFA!   

Compare that with a deposit taking licence which is simply not achievable by a team of less than ten people and a million in capital adequacy – share capital.  IFAC have helped firms get their Emoney licence, and can help your firm too.  An FCA licence is a valuable thing. 

Property funds face fresh battering from Brexit headwinds

Liquidity fears have resurfaced and been widely reported in the FT, as investors step up withdrawals ahead of March deadline for Brexit.  The FCA is considering new rules for property funds that could require them to suspend trading if there was uncertainty around the value of at least 20 per cent of the portfolio.

KEN BAKSH market report

Asset allocation

In general, I think we have to be aware that slowing earnings per share growth, rising interest rates (albeit more dovish prognosis than our last meeting),and major geo-political events (whether just noise. Or reality) will lead to subdued equity returns and continued volatility, in my view.  There are certainly fantastic bargains in the markets at the moment, but I think there will be increased profit warnings as well.  

Extra due diligence and attention to diversification and correlation will be required.

The relative outlook for certain fixed interest investments and" Other" has perhaps improved especially for more cautious accounts, although full account should be taken of liquidity, transparency etc.5%  to 10% returns on certain classes, with the emphasis more on income than capital growth can be achieved, depending on risk attitude

Regarding action points I have not changed my view much from the quarterly, and would probably highlight three things..

UK-The economic situation has developed much as Project Fear predicted nearly 3 years ago Anaemic GDP growth of just over  1% (compared with nearly3% at the time of the vote),nervous consumers and collapse in corporate investment intentions will prevail in my view for a while ,whatever BREXIT outcome.  

A number of domestic sectors will face big problems, bankruptcies, profit warning etc.  However the equity market, especially the FTSE 100 is not representative of these companies and the PE/price/book and especially dividend yield metrics look relatively attractive both in an international comparison and relative to history.  Looking at for instance the results produced by FTSE heavy weights Royal Dutch, BP, Glaxo, Astra, Diageo, BATS, they have responded positively.  For this reason and partly as I do not have a strong view on sterling and most of my clients are predominantly sterling based ,I am suggesting moving more overweight on UK equities, picking stocks and timing carefully.  Apart from a global crash more likely to be initiated by the US, risks to this market stance would include an even weaker economic growth projection, recession, political crisis, which would lead to both a collapse in corporate profits and a short term  dumping of many UK assets by international investors.  Ironically, gilts may bounce on this view, but total returns would be better in other fixed interest plays.

Overseas Over the last two years  the sterling adjusted out- performers were Japan and USA.I continue to like Japan .I remain cautious on the US for reasons of politics, rapidly declining earnings momentum, interest rate dilemma etc. An additional source of uncertainty could be the technology sector, more heavily weighted in the USA, but also remember it's growing weight in emerging market indices. Highish valuations combined with varying earnings growth could be undermined by regulatory "size", and over ownership issues.  I do have a preference for value plays but admit I may be calling this too early.

Other-referring to a catch all of property, absolute return renewable, alternative fixed interest, commodity etc. Subject to caveats of liquidity, transparency etc   I would use this broad class as an alternative to certain conventional fixed interest plays or certain  expensive equity alternatives

Hedging-Although still above the complacent 2017 complacent level, VIX has retreated to a figure which makes equity hedging more attractive covered warrants,

SIPP Compliance

There are a steady stream of stories in the national and financial press around concerns that many people with Self Investment Pension Schemes (SIPPs) have accepted inappropriate investments into their pension pot.  There are a mixture of issues that can cause concern.  Some cases are simple, and others can be more complex than they first appear.  Claims firms are offering a free SIPP investment compliance audit.  This will identify any shortcomings with the SIPP and advise on the way forward even leading to compensation.  It doesn’t take a genius to realise that the claims firms are also IFAs.

Joint liability high watermark

Berkeley Burke granted permission to appeal High Court decision in FOS SIPP case (Court of Appeal)

On 13 February 2019, the Court of Appeal granted permission to appeal the High Court's decision in Berkeley Burke SIPP Administration Ltd v Financial Ombudsman Service Ltd.

But don’t hold your breath. The appeal will be heard by “3rd March 2020”.

This is a very important precedent for all the industry, and if it wins will see the high watermark of joint liability in financial services.  If the firm loses, it opens up the claims market to all parties associated with any failure.  

What does this mean?  If you advise on execution only basis – you can be held liable if the product fails, because you "facilitated" the investment.  This is effectively what Berkeley Burke did, when they managed SIPPs without advising the customer.  Acting as professional trustee only, they allowed the client to choose the investments.  The High Court found that they should have vetted those investments for suitability. 

Guarantees and indemnities for AR firms and indemnity commission agencies

MGI / IFAs are trapped with guarantees over indemnity commission.

Many businessmen would never sign a personal guarantee, but it is notable that they are almost exclusively older types who have been stung in the past.  So this article seeks to explore the subject further.

One way to avoid a guarantee is the rule that if a variation to the terms of the underlying contract.  (see Holme vs Brunskill) happens without the guarantor knowing, then it is often invalid.    Changes to the underlying contract may be agreed informally, with an assumption that the guarantor necessarily consents to such changes.  Another is that the creditor has a duty to disclose to the guarantor in advance any "unusual features" of his relationship with the debtor: North Shore Ventures Ltd v Anstead Holdings 

These rules apply only to guarantees and not to other forms of indemnity, and are only suggested opt outs.  If your firm are applying these terms to AR firms who are taking indemnity commission, then you too need to be aware.  

The guarantor is usually the shareholder of the underlying contracting party. 

Nutmeg’s £350-fee regulated advice service

According to the media this week Nutmeg said it would offer an initial chat to customers free of charge and then charge a fixed-fee of £350 if people decided they wanted "tailored recommendations" through qualified financial advice.

Nutmeg head of financial advice Lisa Caplan said: "In the next few years, the way financial advice is given is going to radically change. People are used to interacting with technology to make so many aspects of their life easier - financial advice is no different."

Well, advisers might have an opinion about that.  But IFAC's own software "BAT" is actively working on a global message centre, where we hope that you can use BAT to communicate to your own clients.  This way clients can receive financial advice and access it in a secure place, and all the warnings and disclosures will be automated, and the interactive correspondence will create the audit trail required.  

Social Media for Financial services

Considering using tweets to get biz?  Think again.  Have you read occasional paper (47) published by the FCA late last year, considering the effect of social media product risk warnings.

In 2015, the FCA published guidance on social media advertising (FG15/4), in which it reminded firms that  character-restricted social media adverts are capable of being a financial promotion, which means it must contain risk warnings.  Consumers are increasingly using social media to research and buy products and so MGI and IFA firms are therefore incorporating it into their marketing strategies. 

However, the requirement is that 

"the advert must be balanced, for example including risk warnings, or information about unusual features, alongside positive information about the product"

This  is a challenge with character limits on texts.  FCA ran a series of behavioural experiments on this subject.  The overall conclusion was that, for character-limited social media, a lack of understanding of risk ultimately leads them into choosing less suitable products.   

Occasional paper 47 scratches the surface of some fundamental risks and the customer understanding of the key features of the products that they buy.  Like many FCA papers, it poses more questions than answers, and needs to be studied with an eye to the future, and how it will look in five years time looking back on today’s adverts etc. 

IFAC hope that this leads to fewer MGI IFAC firms using social media for advertising, until this matter is clarified or the landscape changes.  It should be noted that most networks ban the use of social media.

IFAC do check promotions, and this is an increasingly popular service.  (You should note that Simply Biz charge up to £120 per check!  )

IFAC do it for free!

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