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TAXATION AND TRUSTS

Improving the financial services compensation framework

(AF1, RO3)

On 6 December, the FCA published a discussion paper aimed at maintaining a compensation framework that provides appropriate protection for consumers, funded in a fair and sustainable way.

The Financial Services Compensation Scheme (FSCS) provides compensation when certain authorised financial services firms are unable to meet claims against them. The FSCS plays a critical backstop role in protecting consumers and ensuring confidence in financial services markets.

The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) are each responsible for making rules in relation to the FSCS. The PRA is responsible for rules relating to claims in connection with deposits, insurance provision and dormant accounts; the FCA is responsible for claims in connection with all other relevant types of financial services activities that are protected by the FSCS.

This discussion paper is focused on the aspects of the FSCS rules that the FCA is responsible for. The FCA is seeking views on fundamental questions about the purpose, scope and funding of the FCA's compensation framework to ensure it continues to meet the needs of consumers and firms. Please see DP21/5: Compensation Framework Review.

The FSCS’ operating costs and compensation payments are funded by levies on financial services firms. The overall FSCS levy has increased over the last decade, from £277 million in 2011/12 (excluding costs relating to the banking crisis) to an expected £717 million for 2021/22. According to the FCA, many of the claims driving these costs relate to historic misconduct by firms in the investment sector, including financial advisers and Self-Invested Personal Pension (SIPP) operators, which have subsequently failed. This pipeline of historic claims is expected to result in further FSCS payouts over the coming years.

The discussion paper sets out the following four proposed principles for the aspects of the compensation framework that the FCA is responsible for, and which the FCA considers should underpin its design:

• Principle 1 – the FSCS is a fund of last resort and should not be the first line of defence for protecting customers of authorised firms from harm.
• Principle 2 – FSCS protection for a particular regulated activity and category of individual should increase consumer confidence in the financial services sector. The availability of protection, and the benefits it brings to consumers, should be commensurate to the benefits to financial services markets.
• Principle 3 – the funding model should be robust, be adaptable to a changing external environment, economical and practical to implement.
• Principle 4 – funding classes should provide sufficient funding for compensation whilst remaining sustainable, therefore some degree of cross subsidy may be needed in practice.

And it asks a total of 20 questions, including:

Q7. [Possibly with an eye to the recent London Capital & Finance saga.] How can we make sure that consumers are provided with clear information about the availability of FSCS protection that equips the consumer to make effective and properly informed decisions about financial products and services, including those where FSCS protection is not available?

Q8. When distributing non-UK funds to retail investors in the UK, should firms be required to inform customers when FSCS protection is not available? If yes, how could firms ensure customers are aware of the lack of protection, through the fund’s marketing materials or otherwise?

Q9. Do you consider that ‘high‑net‑worth’ and/or ‘sophisticated’ individuals should be excluded from being able to claim from the FSCS in certain circumstances? If so, should the exclusion(s) apply to all types of claim or just certain categories of claim?

The deadline for responding to the discussion paper is 4 March 2022.

Next steps

The FCA will publish a feedback statement during 2022 which will outline any further steps it intends to take. It also plans to engage with stakeholders directly during the first quarter of 2022, once it has had the opportunity to hear stakeholders’ initial views.

1000 pound boost for nearly 2m working households

(AF1, RO3)

The reduction to the Universal Credit taper rate, as well as an increase to claimants’ work allowances – has been implemented one week ahead of the schedule announced by the Chancellor in his recent Budget.

Claimants will be notified how much Universal Credit they will be awarded in their usual monthly statement, with the first of those to reflect the changes being issued on 24 November.

Work allowances, the amount a claimant can earn before their Universal Credit is reduced, increased by £500 per year from 24 November, meaning families will be able to earn over £500 per month before their benefits are tapered off.

Simultaneously, the taper rate, the amount that a person’s Universal Credit is reduced by when their earnings are more than their work allowance, has dropped from 63% to 55%.

With a number of people expected to now be newly eligible for Universal Credit and those not currently claiming potentially being better off, people are being urged to check a benefit calculator on the government’s website gov.uk to see if they could increase their income.

Those receiving other benefits from the Government including Working Tax Credits should note that if they apply for Universal Credit they cannot return to their previous benefits.

For those not in work, they will continue to benefit from Universal Credit standard allowance and additional extra support if they have children, have a disability or health condition which prevents them from working or need help paying their rent.

Vulnerable households across the country are also able to access a new £500 million support fund to help them with essentials over the coming months.

The devolved administrations will receive almost £80 million of the £500 million (£41 million for the Scottish Government, £25 million for the Welsh Government and £14 million for the Northern Ireland Executive).

As mentioned in our earlier Bulletin, pension contributions, which are 100% allowable for Universal Credit, could benefit from:

• 40% income tax relief;
• 33% UC taper recovery, which is the 55% Universal Credit taper on the net pension contribution; and
• clawback of Child Benefit, currently an effective 18.28% relief for a parent with two children, on adjusted net income between £50,000 and £60,000.

Yes, that is a total effective rate of 91.28%...

New 95 percent mortgage scheme: first set of statistics

(ER1, LP2, RO7)

First announced at the March 2021 Budget, the scheme is available to first time buyers or current homeowners buying a house in the UK with a purchase value of £600,000 or less.

According to these latest statistics, there were 812 mortgage completions from scheme launch on 19 April to end June 2021, which represents 0.7% of all residential mortgage completions in the UK from the beginning of April to end June 2021.

This was expected owing to the infancy of the scheme at this point in time and the average length of time to complete a house purchase.

The corresponding value of the guarantees was £27 million while the overall value of loans supported by the scheme was £185 million.

These mortgages were used to finance properties worth £196 million in total.

The mean value of a property purchased or remortgaged through the mortgage guarantee scheme to the end of June 2021 was £240,993, compared to an average UK house price of £265,668. The median property value was lower at £200,000, reflecting that a higher proportion of properties in the scheme are in the lower value bands.

24% of all mortgage completions through the scheme so far were on properties worth £125,000 or less. 39% of mortgage completions were made on properties valued at £250,000 and above.

The majority of mortgage completions through the scheme were on terraced houses, making up 30% of total completions. 25% of completions in the scheme were on flats or maisonettes, while completions for detached houses and bungalows were much lower, making up 12% and 3% of the total respectively.

Over half of households who completed a mortgage with the support of the scheme had a household income of between £0 and £50,000. Take-up was lower for those on higher incomes; households with an income over £80,000 made up 21% of all completions. The median household income for borrowers using the scheme was £41,524 and the mean household income for borrowers using the 2021 mortgage guarantee scheme was £47,465.

82% of mortgage completions through the 2021 mortgage guarantee scheme to date have been for purchases by first-time buyers.

In Scotland, the proportion of mortgage completions with the support of the scheme was significantly higher than the country’s share of total mortgage completions in the UK as a whole. Since the launch of the scheme, 6% of all UK mortgage completions have taken place in Scotland, compared to 37% of 2021 mortgage guarantee scheme completions.

In Wales, mortgage completions made up 4% of the UK total, compared to 3% of 2021 mortgage guarantee scheme completions.

In Northern Ireland, mortgage completions made up 2% of the UK total, compared to 2% of 2021 mortgage guarantee scheme completions.

Compared with the devolved administrations, the majority of completions through the 2021 mortgage guarantee scheme were in England (58%), relative to England’s 87% share of overall UK residential mortgage completions.

SDLT: mixed-property purchases and Multiple Dwellings Relief (AF1, ER1, RO3)

The Government is seeking views to change the way Stamp Duty Land Tax (SDLT) is calculated for mixed-property purchases which consist of both residential and non-residential property and options to reform Multiple Dwellings Relief (MDR), which is available on the purchases of two or more dwellings.

It has become apparent that the rules for mixed-property transactions are being used by some purchasers to unfairly reduce the SDLT payable, despite the purchase not containing any non-residential aspects.

Mixed-property purchases are broadly subject to SDLT at the lower non-residential rates even where the amount of non-residential land in the purchase is very small. This means that a purchaser pays the non-residential rates where a purchase consists almost entirely of residential land. The significant difference between the tax rates and surcharges for residential and non-residential property has therefore led to some purchasers structuring the purchases so that they do not have to pay the residential rates of SDLT, including where the property they are buying is their own home. This consultation is seeking views on introducing a new apportionment method of calculating tax in mixed-property purchases.

While HMRC has successfully challenged incorrect MDR claims at Tribunal, there has been an increase in incorrect or abusive claims for MDR.

Where MDR is claimed under the current rules, tax for the dwellings is calculated by taking the average paid for a dwelling and then multiplying the tax due on that amount by the number of dwellings.

HMRC is therefore looking to reform the rules and is seeking views on the following options:

• Allow MDR only where all the dwellings are purchased for a ‘qualifying business use’;
• Allow MDR only in respect of the dwellings purchased for a ‘qualifying business use’;
• Restrict MDR by introducing a ‘subsidiary dwelling’ rule;
• Allow MDR only for purchases of three or more dwellings.

In light of the above, the aim of this consultation is therefore to make the system fairer and also to reduce the scope for incorrect or abusive claims.

The consultation will run until 22 February 2022.

INVESTMENT PLANNING

Latest property statistics

(AF4, FA7, LP2, RO2)

The latest property statistics show that compared to September 2021, there has been a noticeable decrease in the number of UK residential transactions completed in October 2021 following significant forestalling activity by taxpayers.

Forestalling is when advanced action is taken to prevent an anticipated event. For the purposes of these statistics, it refers to taxpayers completing property transactions to take advantage of Government policies – namely the ending of the temporarily increased nil rate band for residential Stamp Duty Land Tax from 30 September 2021.

The statistics also show that:

• the provisional seasonally and non-seasonally adjusted estimate of UK residential transactions in October 2021 is 28.2% and 30.1% lower than October 2020 and 52.0% and 48.4% lower than September 2021;
• the provisional seasonally and non-seasonally adjusted estimate of UK non-residential transactions in October 2021 is 10.4% and 7.7% higher than October 2020 and 1.0% and 1.7% higher than September 2021.

Help to Buy ISAs - quarterly statistics released

(FA5)

HMRC’s latest quarterly statistics on Help to Buy ISAs have been released. These cover the period from 1 December 2015 to 30 June 2021.

The statistics show that since the launch of the Help to Buy ISA, 435,798 property completions have been supported by the scheme and 572,490 bonuses have been paid through the scheme (totalling £627 million) with an average bonus value of £1,095.

The table below shows the number of property completions supported by the scheme broken down by property value:

The statistics also show that:

The highest number of property completions with the support of the scheme is in the North West and Yorkshire and The Humber, with the lowest number in the North East and Northern Ireland.

The mean value of a property purchased through the scheme is £175,567, compared to an average first-time buyer house price of £222,712 and a national average house price of £265,668.

The median age of a first-time buyer in the scheme is 28 compared to a national first-time buyer median age of 30.

Individual Savings Accounts: compliance and penalties

(FA5)

The Government is seeking views to strengthen and modernise the Individual Savings Account (ISA) compliance and penalty regime.

The aim of the consultation is to encourage both ISA mangers and investors to get things right to begin with, but also to enable HMRC to apply appropriate sanctions in cases where non-compliance is identified.

The consultation considers the compliance regime applicable to all types of ISA where there has been a failure to comply with any element of the ISA regulations. This includes Cash ISAs, Stocks and Shares ISAs, Junior ISAs, Lifetime ISAs and Innovative Finance ISAs.

HMRC’s current approach to compliance failures in the management of ISAs is set out in the ISA Managers’ guidance. However, even though penalties are levied, some ISA managers repeatedly break the rules and pay the penalty because it is cheaper than fixing their systemic problems. This has led HMRC to question whether the current approach is robust enough to encourage positive compliance behaviours in the management of ISAs. Even a cursory knowledge on the legislation and guidance on pensions compared to ISAs will demonstrate a stark difference in the relatively light-touch applied to ISAs compared to pensions. So it will be interesting to see the outcome and whether any changes are implemented.

The consultation will run until 21 February 2022 and will be of interest to ISA managers, investors, product providers, professional bodies and other interested parties.

PENSIONS

DWP publishes consultation on proposals to remove performance-based fees from charge cap

(AF3, FA2, JO5, RO4, RO8)

The DWP has published a consultation on proposals to remove performance-based fees from the regulatory charge cap that applies to the default funds of occupational DC pension schemes used for auto-enrolment. This is to inform future policy to help ensure DC schemes are able to access a broader range of illiquid asset classes that have the potential to result in positive outcomes for members.

The consultation closes at 11:45pm on 18 January 2022.

Minister for Pensions and Financial Inclusion Guy Opperman stated in a DWP Press Release that the “consultation will look at ways to enable schemes to take advantage of long-term, illiquid investment opportunities and provide better returns for members”. Mr Opperman continued: “Lifting these barriers can also help contribute to the key role finance has in tackling climate change, by mobilising private finance towards clean and resilient growth and addressing market barriers to longer-term investing in green projects.”

Brenda Kite, Hymans Robertson DC Provider and Platform Solutions Lead, stated in their Press Release that she did not believe that “performance-related fees for illiquid assets within the charge cap will be the “game-changer” the Government hopes”. AJ Bell Head of Retirement Policy Tom Selby echoed this sentiment and said: “There is no guarantee that fund managers operating a performance fee structure will deliver better returns than a lower cost fund. It will also be crucial for any scheme considering such investments to ensure the performance fee incentives are aligned with the long-term interests of their members.”

The Pensions and Lifetime Savings Association (PLSA) highlighted the need for transparency. Joe Dabrowski, PLSA Deputy Director of Policy, said in their Press Release: “The charge cap is an important consumer protection that helps derive better value for money for pension savers. Pension schemes will always be interested in investing in assets which have a strong likelihood of delivering higher returns over the long term, but these opportunities must be cost transparent, suitable for their members and provide value for money. For the growth in investment in productive finance it is important that new and innovative products, such as the [Long-Term Asset Fund], come to the market and meet pension schemes' needs, rather than simply a reliance on traditional investment vehicles’ fee models.”

Pension Schemes Newsletter 135 - November 2021

(AF3, FA2, JO5, RO4, RO8)

Pension Schemes newsletter 135  covers the following:

• relief at source ― notification of residency status report for 2022/23;
• relief at source ― receiving your notification of residency status report;
• relief at source ― if you do not receive a notification of residency status report;
• pension scheme migration ― viewing your list of pension schemes;
• pension scheme migration ― scheme administrator IDs that are no longer in use;
• accessing your business tax account;
• annual allowance charge ― members declaring their annual allowance charge on their Self Assessment tax return;
• accounting for tax return.

Areas of interest

Residency status reports

Schemes that have successfully submitted their annual returns of information by 20 September 2021 should receive their notification of residency report in January 2022. This will mean schemes can apply the correct rate of relief at source to scheme members in the 2022/23 tax year.

Scheme administrators who do not receive a residency report can check their members’ residency status using the HMRC look up service.

Annual allowance charge

HMRC ask schemes to remind members who have exceeded their annual allowances, after allowing for any carry forward allowance, to declare this on their Self Assessment tax return. This needs to be done even where scheme pays is being used.

FCA announces plans for stronger nudge towards pensions guidance

(AF3, FA2, JO5, RO4, RO8)

The Financial Conduct Authority (FCA) has announced its final rules which will require pension providers to give a ‘stronger nudge’ to Pension Wise guidance when individuals decide to take their pension benefits.

The rules are designed to increase take up of the Pension Wise service as currently only a small proportion of consumers are doing so before accessing their pensions for the first time. 

The new rules apply from 1 June 2022 and will mean that when an individual has decided they wish to access their benefits, including by transferring them to another provider to do so, pension providers must:

• refer them to Pension Wise guidance;
• explain the nature and purpose of Pension Wise guidance;
• offer to book a Pension Wise guidance appointment. Where this offer is accepted the provider must either book the appointment or provide them with the necessary information to book their own appointment.

The rules will apply to personal pension and stakeholder schemes, including self-invested personal pensions.

The FCA have worked closely with the DWP as the rules have been finalised. The DWP are working on similar rules for occupational pension schemes. 

TPR names first DB superfund to meet its expectations to protect savers

(AF3, FA2, JO5, RO4, RO8)

In Press Releases from both The Pensions Regulator (TPR) and Clara-Pensions it has been confirmed that TPR has named Clara-Pensions as the first new DB consolidation vehicle (DB superfund) to have met tough standards of governance and administration set out by TPR to protect savers. TPR has created an online list which will include any superfund assessed by TPR to have demonstrated, through robust evidence, that it meets several criteria, including good governance, being run by fit and proper people and that it is backed by adequate capital.

Nicola Parish, TPR’s Executive Director of Frontline Regulation, said: “We are determined to protect savers and so potential customers of a superfund on our list can have the confidence that the scheme has been through a rigorous assessment process to show they are fit for purpose. It is vital, however, that trustees and employers still carry out their own thorough due diligence to ensure they are confident a superfund is the right option for their particular scheme and members, and only consider a superfund which is on our list. We expect employers considering a superfund to come to us for clearance.”

This story was also picked up in The Times (thetimes.co.uk of 1 December 2021) and the Financial Times (ft.com of 1 December 2021).

Joe Dabrowski, PLSA Deputy Director of Policy, said in their Press Release that: “TPR’s ‘authorisation‘ of Clara... marks an important milestone in the formation of the superfunds market and provides fresh options for schemes and employers to secure benefits for their members.” Minister for Pensions and Financial Inclusion Guy Opperman also called it a “welcome milestone”. He added: “Superfunds are an innovative development in the defined benefit sphere that can increase protection for savers, and their pensions, whilst providing employers with a new, affordable option to manage their legacy pension responsibilities.”

Commenting on TPR’s announcement that Clara-Pensions has been cleared to accept transfers, Iain Pearce, Hymans Robertson Senior Risk Transfer Consultant, commented in their Press Release that: “The likely candidates to be the first schemes to transfer to a superfund are already very well progressed and have been engaging with TPR for some time. Therefore, we’d expect those first applications to be submitted very quickly, and we may see the first transfers finalised in 2022. However, the requirement to get TPR clearance for every case means that TPR’s initial assessment is not the final hurdle. We expect TPR to closely scrutinise all cases, paying particularly close attention to the first movers.”

Lane Clark & Peacock (LCP) was also very positive in their Press Release and highlighted that this move “may also pave the way for other approaches which involve alternative models for bringing third party capital into DB pension scheme funding (some of which are already marketing themselves)”. LCP also pointed out that schemes will have a variety of options, ranging from full buyout to a transfer to a superfund or other approaches which obtain third party capital support for the scheme, or ongoing run-off until all benefits have been paid, although not all solutions will be appropriate for all schemes, and schemes will not be allowed to transfer to a superfund if buyout in the short to medium term is a realistic possibility. LCP Head of Corporate Consulting Gordon Watchorn commented: “This is a red letter day for pension schemes and the firms who sponsor them... There will clearly need to be careful ongoing regulation of superfunds to make sure they live up to their potential, but [the] announcement by [TPR] marks a major step forward in the world of pensions.”

DWP confirms state pension rates for 2022/23

(AF3, FA2, JO5, RO4, RO8)

The Social Security (Up-rating of Benefits) Act 2021 has received Royal Assent. This means the DWP are able confirm that state pensions will increase by 3.1%, (CPI for the year to September 2021).

As a reminder, the earnings element of the Triple Lock has been suspended for one year. The DWP state this is due to earnings distortions caused by the pandemic.

The Government has stated that the earnings element of the Triple Lock will be reinstated next year.

The 3.1% increase means the basic State Pension will increase to £145.85 per week and the full rate of new State Pension will increase to £185.15 a week.

TPO publishes factsheet on unpaid workplace pension contributions

(AF3, FA2, JO5, RO4, RO8)

The Pensions Ombudsman (TPO) has published a new factsheet, in collaboration with MoneyHelper and TPR, entitled Workplace pensions — unpaid pension contributions. The factsheet aims to provide customers with a clearer understanding of what to do if their employer is not paying contributions into their workplace pension scheme and is designed to signpost customers to the organisations that are best placed to assist them if customers cannot resolve their concerns with their employer.

Legal Director at TPO Claire Ryan commented in their Press Release: “Listening to customers who have contacted The Pensions Ombudsman, it became apparent that the customer journey was not clear and so together with TPR and MoneyHelper, we have worked to create this informative factsheet. We hope to further strengthen our coordinated communications processes to enhance a smoother customer journey.”