The FSA has published its proposed rules governing the sale of Child Trust Fund products, which will be broadly split into stakeholder and non-stakeholder types.
CP04/10Child Trust Funds provides for a consultation period to 3 September, with final rules to be published by October and implemented by 1 December this year.
CTF vouchers – the initial £250 government contribution, plus an additional £250 for qualifying children of lower income families - will be sent to parents as of January 2005.
Firms may start accepting applications as of that time took, however, they will be barred from accepting contributions until April 2005.
Stakeholder CTFs will be equity based with minimum statutory standards, comparable with other stakeholder products – although the “annual management charge” is capped at 1.5% rather than 1%.
The regulator says its proposals have been guided by a brace of concerns: consumer understanding about the lack of government guarantees, and knowledge of savings and investments options available through CTFs; and the need to ensure firms have adequate systems and controls in place to deal with a potentially large volume of CTF business.
There are six main groupings of proposals:
- regulatory permissions and notifications
- business standards
- training and competence
- financial crime and money laundering
- consumer information and education.
Any firm wishing to manufacture CTFs must be FSA authorised.
Consumers must be warned through at points-of-sale that both stakeholder and non-stakeholder options are available, including relevant key features documentation, with the additional warning that money paid in cannot be touched until the relevant child turns 18.
However, firms “will not be required to give projections, including where a customer is investing in a packaged product,” the FSA states.
The regulator proposes credit unions be able to apply for “variation of permission”, essentially a way to enable them to act as introducers without running into regulatory difficulties.
Authorised firms wishing to carry out CTF business will not be required to apply for specific permission.
The FSA and Inland Revenue are working together to ensure an information pack is available that will explain both the stakeholder and non-stakeholder options.
Point-of-sale material must ensure customers know stakeholder CTFs are not backed by government guarantees and that investments are not risk-free.
Because of the £1,200 annual limit there is a risk of oversubscription. This risk is not so great to warrant specific new rules, the FSA adds.
CTF customers should expect annual updates under the proposed rules, rather than every six months or every time a transaction takes place.
Existing suitability rules will apply to advice given on CTFs, including establishing whether a CTF subscription or some other investment would best suit the client looking to put money away for a child.IFAonline
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Reporting to Steve Hill
Appointed on 19 September