Title of the Proposal
7.1 The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2006
Purpose and Intended Effect
7.2 The objective of the changes is:
1. To facilitate the promotion by employers of improved pensions uptake by employees, and;
2. To facilitate improved communication between employers and employees about the types and levels of work-related group insurance cover which employers may wish to take out on behalf of their employees, and to facilitate improved communication between employers and employees about other work-related insurance cover which is not group-based and which employees may wish to take-up directly with FSA-authorised persons.
7.3 This objective will be achieved by:
1. Extending the exemption from the financial promotion restriction provided by Article 72 of The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 – the so-called ‘Financial Promotion Order’ – to apply to third parties as well as to employers themselves.
This exemption allows employers to make real time and non-real time promotions to their employees in relation to group personal pensions schemes and stakeholder pension schemes, without employers needing to be authorised by the Financial Services Authority (FSA) and without these promotions needing to be approved or issued by an FSA-authorised person.
A number of safeguards apply to this exemption in order to protect employees, including that the person making the promotion should be knowledgeable and competent.
Many employers outsource their pensions administration, however, and in these cases the third party pensions administrator rather than the employer may be the most knowledgeable and competent to provide employees with information about the company pensions in question. These proposals seek to extend the current exemption for employers to their (third party) pensions administrators.
2. Providing employers with a new exemption from the financial promotion restriction which enables them to make promotions to their employees in respect of work-related insurance products. Articles 24 and 26 of the Financial Promotion Order respectively already provide exemptions for non-real time and real time communications which relate to ‘relevant insurance activities’.
There may be uncertainty amongst employers as to whether these exemptions apply to all types of work-related insurance products.
7.4 In particular, the changes achieve this by:
1. Applying the current exemption in Article 72 of the Financial Promotion Order to persons who are subject to a written contract with the employer, and requiring such persons to disclose to the employee the size of any direct financial benefit they will receive as a result of making a promotion to that employee.
The employer must be satisfied that the pensions administrator is knowledgeable and competent to provide advice, although this may appear in guidance, not as a legal requirement. These conditions should provide employees with additional safeguards.
2. Providing employers with a new exemption from the financial promotion regime, in particular to enable employers to make real time and non-real time promotions to their employees in respect of work-related insurance products.
The conditions attached to this exemption are that the employer should not receive commission if the employee takes out his individual insurance policy, and the employer should inform the employee of their right to seek advice from an authorised person or an appointed representative. Work-related group insurance products are normally taken out by the employer with an FSA-authorised person (e.g. an insurer or broker), for the benefit of employees.
This exemption should enable employers to provide information to their employees about the nature and levels of group cover available, thereby helping employers and employees to agree what group cover should be provided. This exemption should also enable employers to provide employees with information about individual cover which they may wish to take out themselves as a complement to the group cover provided.
7.5 Those affected most by the changes will be:
1. Employers who provide group personal pension schemes or stakeholder pension schemes and who have outsourced their pensions administration to third parties, and their employees.
These pensions administrators should be able to promote the uptake of pensions to the employees in question, who might seek more pensions-related advice as a result. Persons authorised by the FSA might be affected indirectly if more employees seek individual advice from them as a result of receiving information from their pensions administrator, and if more employees take up a pension or increase the size of their pension investment.
2. Employers who provide work-related group insurance cover to their employees, and their employees. Employers are likely to communicate more with their employees about what level and type of group cover should be taken out by the employer on behalf of employees, and about what types of individual cover are available.
Persons authorised by the FSA, in particular brokers and insurers, are likely to be affected indirectly if more employers take up a wider range and/or higher levels of group cover, or if employees take up a wider range and/or higher level of individual cover as a result of being made more aware of what group cover is provided and what other cover is available in the market.
Background
7.6 These changes are related to two features of the financial services regulation framework. Firstly, unauthorised persons making unapproved financial promotions risk civil or criminal sanctions.
Obtaining approval from an FSA-authorised person for a communication which is considered to be a financial promotion can be expensive, and it may be difficult to find an FSA-authorised person willing to provide this service. Secondly, the definition of which communications might be considered to be financial promotions may appear to be complicated and/or unclear, and hence difficult and/or expensive to determine.
7.7 These features mean that unauthorised persons may adopt a cautious approach towards making communications which might appear to be financial promotions. In the past for this reason many employers have been reluctant to provide their employees with information about certain company pensions.
The changes outlined above should remove these uncertainties for third party pensions administrators and for employers who wish to provide employees with information about work-related insurance products.
Rationale for Intervention
7.8 The rationale for intervention and purpose of changing the current regime is to reduce uncertainties regarding the scope of financial services regulation which have the effect of restricting the flow of information to employees about company pension schemes and work-related insurance products.
By improving the flow of information to employees, employees will be better-placed to form optimal decisions about how much to invest in their pensions, about how much work-based group insurance cover they would like their employer to provide, and about how much other work-related insurance cover they themselves may wish to take out.
Consultation
7.9 The February 2004 consultation document ‘Financial Services and Markets Act: Two Year Review: Changes to Secondary Legislation’ invited views on the desirability of providing employers with an exemption from the financial promotion regime in respect of communications made by them to their employees about group personal pension schemes and stakeholder pension schemes.
A number of respondents to this consultation who approved these proposals suggested that they should be extended to work-related insurance products. One respondent subsequently proposed that they should also apply to pensions administrators.
7.10 This Partial Regulatory Impact Assessment (Partial RIA) concerns these two proposals, notably:
1. To provide a new exemption in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 for communications made to employees about company pension schemes by the employer’s pensions administrators; and
2. To provide a new exemption in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 for communications made be employers to employees about work-related insurance products.
7.11 This Partial RIA lays out the implementation options for the two areas highlighted above and considers the costs and benefits for each option. Risks, unintended consequences, any compliance and enforcement issues, competition issues and the impact on small firms have also been considered.
7.12 When formally responding to the Partial RIA we are seeking comments on the analysis of costs and benefits, likely risks and unintended consequences of the proposed options, as well as supporting evidence wherever possible. If you feel there are alternative options, or indeed alternative combinations of existing options, please suggest these.
The feedback to this Partial RIA will provide valuable information which will feed into the Final RIA following this consultation. The consultation document and Partial RIA should be read together.
Chapter 1 Extending Employers Freedom – Introduction
Chapter 2 Responding to the Consultation
Chapter 3 FSMA Two-Year Review Exemption
Chapter 4 Pensions Promotions to Employees
Chapter 5 Promoting Insurance Products
Chapter 6 Employee Share Schemes and Plans
Chapter 7 Partial Regulatory Impact Assessment
Chapter 7A Options – Legislate or Not
Annex A Current Pensions Exemption
Annex B Current Insurance Exemptions
Annex C Proposed New Legislation
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