 |
|
| Financial Law Update | Back to article summary. |
| Consumer protection code and minimum competancy requirements published by the financial regulator | ||
| |
||
| Consumer protection code and minimum competancy requirements represent a raising of the bar in an effort by the Financial Regulator to standardise the approach regulated firms take to dealing with consumers across the broad spectrum of the financial services industry. In this article Joe Beashel outlines both the Consumer protection code and minimum competancy requirements. | ||
With the publication by the Financial Regulator of its Consumer Protection Code ('CPC') and its Minimum Competency Requirements ('MCR') the Financial Regulator has realised its ambition to provide a standardised approach to the conduct of business for all regulated entities, across all financial products and services in Ireland. The new codes are not voluntary, rather they are legally binding with contraventions being subject to possible administrative sanctions. Such administrative sanctions could lead to fines of up to €5 million for companies or personal fines of up to €500,000 'for persons concerned in the management' of such companies. Where a requirement of the CPC conflicts with a requirement of a voluntary code (such as the codes of conduct of the Irish Insurance Federation and Irish Banking Federation) the CPC will take precedence. As such, and in common with all regulatory matters in recent years, compliance professionals, legal teams and management or regulated firms will need to devote time to considering the implications of these changes on their businesses. The precise impact will vary from business to business, but all will need to review their processes, procedures, systems, documentation and staff training and from this review, develop a comprehensive implementation plan.
Consumer Protection Code ('CPC') The CPC was effective from 1 August 2006 but the Financial Regulator acknowledged that some changes would take regulated firms some time to implement, although it expects firms to take 'immediate steps' towards implementing the necessary changes. Some specific new requirements must be adhered to from the end of August 2006 including, inter alia, a prohibition on making the sale of one product contingent on the purchasing of another product, new rules on notification of changes in interest, a prohibition on unsolicited pre-approved credit and new requirements for warning statements on all advertisements created after August 31st 2006. CPC and MiFID Firms dealing with investment products will be aware that the Markets in Financial Instruments Directive (2004/39/EC)('MiFID') is due to be enacted by end January 2007 and must be fully implemented by November 2007. MiFID is a wide-ranging directive which includes a new set of comprehensive pan-European conduct of business rules for investment instruments. Unlike the UK, where the FSA is undertaking an exercise to ensure that the same conduct of business rules will apply to all financial products (whether covered by MiFID or not), the Financial Regulator will, in the future, have two sets of rules: the CPC which contains general principles and specific rules for most financial products and services, and separate 'MiFID rules' which will cover MiFID instruments only. While the broad thrust of both enactments are similar, regulated firms will need to examine both sets of requirements in detail to ensure that both are complied with. A practical example is tracker bonds - while typically structured as deposits, they are classified as investment instruments for the purposes of the Investment Intermediaries Act but they are covered by the CPC and not MiFID rules because Tracker Bonds are not listed as investment instruments in MiFID, indeed the CPC has extensive new disclosure requirements with respect to tracker bonds. A 'MiFID' Handbook and Code of Conduct will therefore be retained and will sit alongside the CPC requirements. Application of the CPC Twelve general principles are set out and apply to all dealings with customers in Ireland. These include obligations to act honestly, fairly and professionally in the best interest of customers and the integrity of the market, to make full disclosure of all relevant material information, including all charges, in a way that seeks to inform the customer, to act with due skill and in the best interests of customers and not to deliberately mislead a customer as to the real/perceived advantages or disadvantages of any product or service and to comply with the spirit and letter of the code. Specific conduct of business rules are set out for dealings with consumers. The definition of consumer mirrors that in the Financial Services Ombudsman's scheme and means a person acting outside his/her trade, business or profession, an unincorporated body or an incorporated body with a turnover below €3 million or a member of a credit union. While the general principles apply to both consumers and customers, as defined, the majority of the Code applies only to consumers, and therefore will not apply to professional clients of financial services firms. Common conduct of business rules - description of the sales process Before transacting any business for a consumer, all regulated firms must provide him or her with a copy of their terms of business. The firm must take steps to 'know their customer' by ensuring an appropriate fact find is completed. Having regard to all the facts disclosed a suitability letter must be given to the consumer. These requirements do not apply to 'execution-only' transactions, or to sales of foreign currency or of basic banking products or services. The term 'execution-only' is not in fact used in the CPC but it is described where a consumer has specified both the product and the product provider and has not received any advice. A 'basic banking product' is defined as a current account, overdraft, ordinary deposit account or a term deposit account with a term of less than one year. The exclusion of such basic, uncomplicated and generally familiar, day to day banking products is, in our view, a reasonable relaxation of these new rules. In addition, the CPC deals with a range of other matters from restricting cold calling to requiring full and transparent disclosure to consumers of all charges, to imposing time limits within which complaints must be investigated and resolved, and imposing a specific six year 'from the date the relationship ends' time limit for the maintenance of customer records. Minimum Competency Requirements The Minimum Competency Requirements (the 'MCR') establishes, from 1 January 2007, a scheme of minimum competency requirements for all financial services providers. The requirements apply to individuals, who on a professional basis, as, for or on behalf of a regulated firm:
'Specified activities' include:
Retail financial products are very broadly defined and include: life assurance protection policies, general insurance policies, shares, bonds and other investment instruments, saving, investment and pension products, housing loans and associated insurances, consumer credit and associated insurances. As in the case of the CPC, basic banking products are not included. The Financial Regulator has defined 'advice as' - a recommendation or opinion provided to a consumer which may lead to the consumer to enter into or to become entitled to benefit under - one or more retail financial product'. Helpful clarification is provided by excluding the provision of a brochure or booklet or other information only to a consumer from the meaning of advice. Importantly, the requirements are not confined to the relatively small group of individuals who provide professional investment advice but also apply to a broad category of persons, those who 'arrange or offer, to arrange' retail financial products. Requirements So called 'accredited individuals' will be required to hold minimum qualifications and to undertake a programme of continuing professional development. A range of qualifications approved by the Financial Regulator, and relevant to each product area, are set out in Appendix 2 of the MCR document. The MCR sets out detailed grandfathering provisions as follows:
The MCR provides for more limited requirements for individuals whose only investment activities consist of referring or introducing customers to regulated firms and for those whose activity is the processing of quotation requests within a narrow and rigid set of acceptance criteria. Summary Both sets of changes represent an effort by the Financial Regulator to standardise the approach regulated firms take to dealing with consumers across the broad spectrum of the financial services industry. They represent a further and in some cases, significant, raising of the bar by the Financial Regulator. Although the challenge of implementation will differ for all firms there is no doubt that effective implementation of these changes is an important priority for the Financial Regulator and firms would be well advised to carefully plan how they deal with these new regulatory challenges across their organisations. |
||
Joe Beashel is a partner in the Banking and Financial Services Department at Matheson Ormsby Prentice and is head of the firm's Regulatory Risk Management and Compliance Group. He can be contacted by phone: +353 1 619 9000 or by email: joe.beashel@mop.ie. Further information on the firm is available at www.mop.ie |
