March 2016 Budget: key financial services announcements

Practical Law UK Legal Update 5-625-0085 (Approx. 8 pages)

March 2016 Budget: key financial services announcements

by Practical Law Financial Services

Banking, finance and lending

The March 2016 Budget contains announcements on the following banking, finance and lending measures and policy decisions that are particularly relevant to the financial services sector:

Basic bank accounts. As previously announced, the government will require nine high street banks to offer basic bank accounts to help people access basic banking services (see Legal update, Free basic bank accounts available from 1 January 2016). It has also committed to publish basic bank account market share data for the first time in autumn 2016.
Competition in UK retail financial services. The government will:
- continue to pursue more proportionate capital requirements for small banks and building societies in the EU;
- work with the FCA and PRA new bank start-up unit to promote the authorisation of new banks (for more information on the new bank start-up unit (see Legal update, FCA and PRA launch new bank start-up unit); and
- ensure Bacs takes action to further improve the Current Account Switch Service (CASS) (see Legal update, FCA finds current account switching service working for consumers).
Credit Information Regulations: designation. On 1 April 2016, the government will formally designate the banks and credit reference agencies (CRAs) required to share credit data under the Small and Medium Sized Business (Credit Information) Regulations 2015 (SI 2015/1945). This will ensure that CRAs receive SME credit information from high street banks, and provide equal access to this information to all finance providers.
For more information on the Credit Information Regulations, see Legal update, Small and Medium Sized Business (Credit Information) Regulations 2015 and Small and Medium Sized Business (Finance Platforms) Regulations 2015 published.
Finance Platforms Regulations: designation. The government intends to designate Bizfitech, Funding Options, and Funding XChange as finance platforms under the Small and Medium Sized Business (Finance Platforms) Regulations 2015 (SI 2015/1946), to help match small and medium-sized enterprises (SMEs) that have been rejected for finance by designated banks with alternative finance providers.
For more information on the Finance Platform Regulations, see Legal update, Small and Medium Sized Business (Credit Information) Regulations 2015 and Small and Medium Sized Business (Finance Platforms) Regulations 2015 published.
Corporation tax: bank loss relief restriction. From 1 April 2016, the government will further reduce, from 50% to 25%, the amount of profit that banks can offset with pre-2015 losses. This will maintain the exceptional treatment of banks' losses relating to the financial crisis and subsequent misconduct scandals. Banks' post-2015 losses, as well as any pre-2015 losses covered by the existing reliefs for new-entrant banks and building societies, will be treated in the same way as with any other industry group. This restriction will remain subject to a £25 million allowance for building societies and an exemption for losses incurred by new-entrant banks.
A related policy paper provides more information on this measure.
Banking companies: excluded entities. The government will amend the definition of a bank used in UK tax legislation, to ensure that this is targeted as intended. A related policy paper provides more information on this measure.
Bad debt relief on peer-to-peer (P2P) lending. As announced in the 2014 Autumn Statement, the government is introducing legislation in the Finance Bill 2016 to allow individuals who make loans through P2P platforms to offset bad debts arising against the interest they receive from PSP loans when calculating their taxable income. For more information, see Legal update, Draft Finance Bill 2016 legislation: key financial services measures.

Investment funds and asset management

The March 2016 Budget contains announcements on the following measures and policy decisions relating to investment funds and asset management that are particularly relevant to the financial services sector:

Amendments to the Limited Partnerships Act 1907 applied to collective investment schemes (CISs). The government will introduce a final package of amendments to the Limited Partnerships Act 1907, to make it a more competitive vehicle for unauthorised funds.
This follows a July 2015 HM Treasury consultation seeking views on a number of proposed amendments to the Limited Partnerships Act 1907 (see Legal update, Limited partnerships: consultation on amendments to Limited Partnerships Act 1907 for private equity investments). The government will publish its response to this consultation on 24 March 2016, and will implement the amendments in legislation in due course.
Asset managers: performance linked rewards. The government has finalised the income-based carried interest rules (see Legal update, Draft Finance Bill 2016: fund managers' performance-related returns) and will legislate to determine when performance awards received by asset managers may be taxed as capital gains rather than income. An award will be subject to income tax, unless the underlying fund undertakes long term investment activity (that is, with investment horizons longer than three years), in which case carried interest will be taxed as a capital gain.
Venture capital schemes (VCTs). The government will make technical clarifications to the Enterprise Investment Scheme (EIS) and VCTs to ensure that the legislation introduced by the Finance (No.2) Act 2015 works as intended.
Authorised contractual schemes (ACSs). The government will consult later in 2016 on measures to streamline the tax rules for investors in ACSs and reporting requirements.
Automatic deduction of savings income tax. The government will change the tax rules so that interest from open-ended investment companies (OEICs), authorised unit trusts (AUTs), investment trust companies (ITCs), and P2P loans may be paid without deduction of income tax from April 2017.

Insurance

The March 2016 Budget contains announcements on the following insurance measures and policy decisions that are particularly relevant to the financial services sector:

Insurance linked securities (ILS). On 1 March 2016, HM Treasury published a consultation paper on proposals for a new, competitive framework for ILS business, including the supervision, corporate structure and taxation of ILS special purpose vehicles (SPVs) (see Legal update, HM Treasury consults on insurance linked securities). The consultation closes to responses on 29 April 2016.
The Bank of England and Financial Services Bill, which is currently before Parliament, contains a power to make regulations for the tax treatment of ILS, at the level of issuers and the investor. The government will then consult on new regulations, which will be finalised by the end of 2016.
For an overview of the Bank of England and Financial Services Bill, see Practice note, Bank of England and Financial Services Bill 2015-16.
Insurance companies carrying on long-term business: amendments to Finance Act 2012. The government will legislate to amend the taxation of life insurance companies under rules introduced by the Finance Act 2012, to ensure the regime works as intended in relation to the treatment of intangible fixed assets debits, deemed income and trading losses in certain specified circumstances. A clause relating to this measure is included in the Finance Bill 2016 (see Legal update, Draft Finance Bill 2016 legislation: key financial services measures).
Life insurance taxation. The government will change the current tax rules for part surrenders and part assignments of life insurance policies, to prevent excessive tax charges arising on these products. The government will consult later in 2016 on alternatives to the current rules, with a view to legislating in the Finance Bill 2017.
Insurance premium tax (IPT). The standard rate of IPT will be increased from 9.5% to 10%, for premiums received on or after 1 October 2016.

Pensions

The March 2016 Budget contains announcements on the following pensions measures and policy decisions that are particularly relevant to the financial services sector:

Pensions dashboard. The government will ensure that the pensions industry designs, funds and launches a pensions dashboard by 2019. This will be a digital interface enabling an individual to view all their retirement savings in one place.
Pensions advice allowance. In line with the FAMR recommendations (see Financial Advice Market Review (FAMR) below), the government will, during summer 2016, consult on introducing a pensions advice allowance. This will allow individuals to withdraw £500 tax-free before the age of 55 from their defined contribution pension, to redeem against the cost of financial advice (the precise age at which people will be able to do this will be determined under the consultation process).
Pensions guidance providers. The government will restructure the delivery of public financial guidance, including by the Pensions Advisory Service and Pension Wise, to make it more effective. For more information, see Public financial guidance review below.

Financial Advice Market Review (FAMR)

The FAMR final report was published on 14 March 2016 (see Legal update, FAMR final report).

The government commits to implementing all of the FAMR recommendations for which it is responsible. Among other things, to remove regulatory uncertainty, it will consult on amending the definition of regulated advice in the existing Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO) to bring it in line with that of the Markets in Financial Instruments Directive (2004/39/EC) (MiFID). This would mean that regulated advice is based upon a personal recommendation.

It will also consult, during summer 2016, on introducing a pensions advice allowance (another FAMR recommendation) during summer 2016. For more information, see Pensions above.

Claims management companies (CMCs)

The government accepts the recommendations of the independent review of claims management regulation, commissioned by HM Treasury and the Ministry of Justice (MoJ), the findings of which were published in a report alongside the March 2016 Budget.

In line with the recommendations, the government will establish a new, strengthened regulatory regime for CMCs, by:

Transferring supervisory responsibility from the MoJ to the FCA. The date of the transfer will be announced in due course.
Requiring re-authorisation (under a robust new process, tailored to the specific sector in which they operate) of all CMCs that wish to continue trading.
Introducing a senior managers regime, requiring persons wishing to perform controlled functions to pass a fit and proper persons test, and to be held personally accountable for rule breaches for which they are responsible.
Developing a standardised disclosure document for each claims management sector, combining the smarter communications tools identified by the FCA to ensure that consumers are better informed when signing a contract with a CMC.
Bringing in better signposting to alternative (and potentially free) claim resolution channels, to help enhance consumer awareness and enable users to make fully informed decisions.
Considering whether smaller fines or mandatory training may have a complementary effect as a credible deterrent by showing that the regulator will not tolerate persistent or deliberate rule breaches. Tough enforcement action should be taken against unauthorised activity.

Public financial guidance review

The government will restructure the delivery of statutory public financial guidance (that is, the public provision of free-to client, impartial financial advice) to make it more effective. The new delivery model will direct more funding to the front line and focus support on areas of greatest consumer need. It will replace the Money Advice Service (MAS), and merge the functions of the Pensions Advisory Service and Pension Wise.

The new delivery model comprises:

A new pensions guidance body, to make sure that consumers can get all their pensions queries answered in one place, at all stages of their lives. This will incorporate the functions currently provided by The Pensions Service and Pension Wise, and some pensions guidance provided by MAS.
A new, slimmed-down money guidance body, charged with identifying gaps in the financial guidance market and commissioning providers to fill these gaps, to ensure that consumers can access the debt advice, money guidance and financial capability projects or services that they need. Third party providers will be provided with funding to deliver those projects or services.

Alongside the March 2016 Budget, HM Treasury has published a further proposal for consultation, in which it sets out (in chapter 2) its plans to restructure the delivery of public financial guidance. It is seeking views on how to set up and evaluate the guidance services provided through the new delivery model to be of most value to the consumer. It welcomes views on how to create effective links between the two new guidance bodies and the wider sector, to ensure that consumers can move easily between guidance and advice providers.

In chapter 3, the proposal document incorporates the government's response to HM Treasury's October 2015 consultation on public financial guidance (see Legal update, HM Treasury consults on public financial guidance). Chapter 4 of the proposal document formally concludes the independent review of MAS, the outcome of which was published in March 2015 (see Legal update, Independent review of MAS: publication of review and HM Treasury, FCA and MAS responses).

In the proposal document, HM Treasury notes that respondents to its October 2015 consultation were strongly supportive of restructuring the current arrangements to improve the offer to consumers. It adds that the FAMR final report has identified opportunities to improve consumer access to financial advice, which will inform where publicly funded guidance could add most value (see Legal update, FAMR final report).

The transition from the current organisations (that is, MAS, the Pensions Advisory Service and Pension Wise) to the new delivery model will require primary legislation. The government will engage with the three affected organisations and regulators in finalising legislation and governance arrangements. Legislative changes are likely to take six to twelve months, and the government would like to allow a reasonable transition period. This means that the earliest date that the new delivery model will take effect is April 2018. MAS, the Pensions Advisory Service and Pension Wise will therefore continue to provide guidance to consumers for at least the next two financial years.

In addition, the FCA will also consult on clear and understandable labels for advice and guidance, which will be tested by consumers and firms before being rolled out. The terms used in public financial guidance review documents will be updated following the FCA's consultation, if appropriate.

The proposal document closes to responses on 8 June 2016. The government will consider the responses received over the summer, and in parallel, work closely with the affected organisations to finalise the delivery model. A final response will be published in autumn 2016.

For an overview of MAS, see Practice note, Money Advice Service. For information on Pension Wise, see Practice note, Hot topics: FCA pension reform measures: Pension Wise guidance guarantee and retirement risk warnings.

FinTech

The government is examining the recommendations from the recent Fintech benchmarking exercise, as set out in a report entitled "UK FinTech: On the cutting edge: An evaluation of the international FinTech sector", which was commissioned from EY by HM Treasury and published on 24 February 2016.

Further measures to support the FinTech sector will be announced in the coming months. These build on actions the government has already taken, including support for alternative lending, to make the UK the global FinTech capital.

Competition and Markets Authority (CMA)

The government will enhance the role of the CMA in the regulated sectors (including the financial services sector).

The CMA will:

Enhance its annual concurrency report on the operation of the concurrency arrangements between the CMA and the sectoral regulators, to improve competition in the regulated sectors. In future, the report will cover new regulations put into place during the year that might significantly affect competition and innovation. It will also propose areas where changes to regulation might allow better competition and innovation.
Include an estimate of the impact of its contribution to competition enforcement cases led by sector regulators in its published performance monitoring benefit to cost ratios.

Access to data held by online intermediaries and operators of digital wallets

Following an announcement made in the July 2015 Budget, the government will now legislate in the Finance Bill 2016 to extend HMRC's powers to obtain data from online intermediaries and electronic payment providers, in order to find those operating in the hidden economy.

March 2016 Budget: key financial services announcements | Practical Law