Money Covered: The Week that Was - 28 July
Welcome to The Week That Was, a round-up of key events in the financial services sector over the last seven days.
Season 2, Episode 5 of our podcast, Money Covered - The Month That Was, where the team discusses key developments and topical issues in the financial services area, is now available. This episode features David Allinson and Ash Daniells discussing claims which involve Equity Release Products.
To listen to this and all previous episodes, please click here.
Headline Development
Supreme Court rules litigation funding deals unenforceable
The Supreme Court has ruled that litigation funding arrangements are unenforceable, in a decision that will have significant implications for litigation funders.
The case – PACCAR Inc & Ors v Competition Appeal Tribunal & Ors – concerned collective proceedings against truck manufacturers that were found by the European Commission to have operated a cartel. These proceedings were supported by litigation funding agreements under which the funders' remuneration was calculated by reference to the damages recovered. Truck Manufacturer DAF argued that such agreements in fact constituted Damages-Based Agreements (DBAs), which was rejected by the Competition Appeal Tribunal and the Divisional Court following DAF's judicial review.
The Supreme Court ruled that the litigation funding agreement fell within the statutory definition of DBAs. 4 of the 5 justices ruled that litigation funding agreements fell within the express definition of 'claims management services' which includes 'the provision of financial services or assistance' in the Compensation Act 2006. It was found that, as such agreements fall within the statutory definition of DBAs (and as the funding agreement did not satisfy the conditions for a DBA) the agreements would be unenforceable.
This ruling could have a significant impact for litigation funders, potentially rendering many funding agreements currently in place unenforceable. It is also a potential blow for the government as the collective funding of consumer claims has helped bridge the gap caused by the reduction in state funded legal assistance of civil claims.
It remains to be seen how the funding industry will respond and adapt. It seems likely that litigation funders will continue to finance meritorious claims, but change how they structure the arrangements in order to do so.
To read more, please click here.
Consumer Duty
Advisers expect fees to increase with Consumer Duty
According to a survey by wealth management company Quilter, around one-third of financial advisers anticipate that customer fees will rise as a result of the upcoming implementation of the Consumer Duty. The survey found that 32% of advisers expect fees to increase, with 44% expressing concerns about declining profitability as a result the Consumer Duty, and just 5% forecasting increased profitability.
One of the aims of the Consumer Duty – which comes into force on Monday (31 July 2023) – is to ensure customers receive 'fair value'. As such, Quilter believes that advisers will have to carefully consider their pricing to ensure that they meet the requirements of the Consumer Duty. To combat this, Quilter expects that tiered adviser charging models will increase in popularity, as they offer more flexible fee structures and better cater to different customer segments.
To read more, please click here.
Provider Consumer Duty assessments do not reflect adviser experience
With days to go before the Consumer Duty kicks in, providers and platforms are churning out vague value assessments, which are "spectacularly misaligned" with reality, giving advisers a headache, according to compliance consultant Carla Langley.
The Financial Conduct Authority (FCA) asked providers and platforms to have their value assessments ready by the end of April, to allow advisers to consider them and undertake analysis of the fair value across the distribution chain. However, according to compliance consultant Carla Langley, those value assessments largely tell us nothing other than "we believe our products offer fair value to clients" without any tangible evidence or rationale to back that up.
Langley notes a lack of honest statements from providers and platforms about where they are falling short of delivering fair value and what they plan to do to resolve that. This means that advisers are unable to assess fair value properly, since their own ongoing research and due diligence does not stack up against providers' and platforms' own assessments. This leads to confusion.
Langley recommends that advisers should hold providers and platforms to account, stating that they should point out that their experience does not align with providers' fair value assessments. Langley criticises providers and platforms and says they need to up their game and start being more open around their value assessments, their weaknesses and how they aim to improve.
To read more, please click here.
Developments for FCA Regulated Firms
FCA Annual Report 2022/23 shows increase in s.166 reports and large drop in RDC decisions
Data in the FCA Annual Report and Accounts 2022/23 (published on 19 July 2022) shows an increase in the use of Skilled Person Reports under section 166 of the Financial Services and Markets Act 2000 (FSMA). Appendix 2 of the Report shows that the FCA used the section 166 power in 47 cases in 2022/23, up from 38 in 2021/22. In 4 of these cases, the FCA used its powers to appoint a skilled person firm itself.
The Retail Investments sector saw the most skilled person reports commissioned with 14 in total, followed by Retail Banking & Payments and Wholesale Financial Markets, both with 9 reports. Section 166 powers were used 8 times in the Investment Management sector, and once in the Pensions & Retirement sector.
Regulated firms incurred £35.1m in costs for section 166 work undertaken. This sum includes work completed for reviews in progress from previous years. Whilst the number of reviews was up from 2021/22, the costs incurred by firms was slightly below the previous years' figures (£37.7m).
The Regulatory Decisions Committee (RDC) saw a big drop in the number of decisions it made, down to 39 compared to 132 in the previous year. This was the result of the narrowing of RDC's remit in November 2021.
To read the FCA Annual Report and Accounts 2022/23, please click here.
Developments for Pension Professionals
Lessons to be learned from Norton collapse
Following the collapse of the Norton pension scheme, the Works and Pensions Committee (WPC) will consider what lessons can be learned in order to protect and support members, many of whom have lost their entire pension savings.
The review will consider (a) the Pensions Regulator's (tPR) approach to preventing fraud and dishonesty, resulting in pension loss; (b) the efficiency of compensation assessments and payments to affected members; and (c) what roles are played by the Pensions Ombudsman, tPR, Pension Protection Fund and independent trustees in combatting fraud.
The WPC has welcomed submissions by 27 October, focusing on points such as tPR's permissions, the simplification of the Fraud Compensation Fund process and the co-ordination with other bodies.
Further information can be found here.
HMRC Updates
Strict criminal offence on the horizon for promoters of tax avoidance schemes
HMRC has published draft legislation for the Finance Bill 2024 which would create new strict liability criminal offences for promoters failing to comply with "Stop Notices" and creating new powers for HMRC to bring disqualification against directors of companies involved in the promotion of tax avoidance.
The proposals are intended to build on the anti-avoidance measures which were introduced in the Finance Acts of 2021 and 2022. HMRC's intention is to strengthen existing deterrents and make it riskier for promoters to continue promoting tax avoidance schemes.
Promoters of tax avoidance schemes that fail to comply with Stop Notices would be targeted with the strongest possible sanctions including up to 2 years imprisonment. Stop Notices are legally enforceable notices which can be issued to any person suspected of promoting a tax avoidance scheme providing certain conditions are met. Such notices require that promotors immediately stop promoting the specified scheme. The new strict liability criminal offence would apply to all live Stop Notices including those issued before the changes come into effect.
The new proposals would also allow HMRC to apply to the court for a disqualification order in relation to directors and other persons who control or exercise influence over a company involved in promoting tax avoidance.
The closing date for comments on the draft legislation is 12 September 2023. To read more please click here.
FRC Updates
FRC thematic review of disclosures concerning climate-related metrics and targets
On 26 July 2023, the Financial Reporting Council (FRC) published a thematic review, assessing the quality and maturity of climate-related metrics and targets disclosures.
Premium listed companies are required to produce 'Task Force on Climate Related Financial Disclosures (TCFD)'. The review focused on TCFDs from the 2022 annual reports of 20 such companies across four sectors: asset managers, banks, materials and buildings, and energy. The FRC found an incremental improvement in quality of reporting of net zero commitments and emissions targets and reported an increased transparency in companies' statements on their compliance with the TCFD framework.
However, the FRC reported that, given the large volume of information presented, some companies struggled to clearly or concisely communicate their plans for transitioning to a low carbon economy. As such, the FRC identified a few keys areas of improvement, which include better explanations of how financial statements are affected by climate targets, and the use of clearer metrics to track a company's performance against its targets. The FRC hopes that having a more refined reporting system will result in 'clearer and more concise disclosures reflecting how companies measure and manage their individual climate risks and opportunities.
To read the full thematic review, click here.
Case Law Updates
A narrow escape – software services provider entitled to rely on single aggregate liability cap (Drax v Wipro)
The High Court has examined limitation of liability clauses in the case of Drax Energy Solutions Limited v Wipro Limited [2023] EWHC 1342 (TCC).
The case demonstrates the potentially narrow and purposive approach the courts may adopt when construing limitation of liability clauses within their factual and commercial context. It is a reminder of the need for clear and careful drafting – parties will invariably look to introduce liability caps when conducting business and agreeing contracts to do so, but it needs to be clear how the cap applies and what the cap applies to.
Click here to read RPC's blog about the issues in the case and the practical takeaways.