When is an ineligible complainant not an ineligible complainant? (And why this matters if you are a UK AIFM or UCITS manager)

Note:

• The following development potentially affects Financial Conduct Authority (FCA) regulated UK AIFMs and UCITS managers - it does not affect MiFID firms (such as UK sub-advisors).
• The changes described below relate to who can bring a complaint against a firm to the Financial Ombudsman Service - the rules as to who can claim compensation under the Financial Services Compensation Scheme are not affected.

Introduction

If you are an FCA regulated asset manager, it used to be so straightforward:

• your client would typically be the fund and the fund could typically be categorised as a professional client
• professional clients could not be an "eligible complainant", so would be unable to make a complaint against you to the Financial Ombudsman Service (FOS), and
• as you weren’t conducting business with eligible complainants (and had no reasonable likelihood of doing so), you could claim an exemption from paying the FCA levy which goes towards funding the FOS.

So, what’s changed? Why does it matter? And what actions should you consider taking as a result?

What’s changed?

As we have previously reported, in July 2015, the FCA implemented the Alternative Dispute Resolution Directive. As part of this work, a new provision was introduced into the Dispute Resolution: Complaints sourcebook (DISP) to the effect that the rule stating that professional clients were not eligible complainants was no longer applicable “to a complainant who is a consumer in relation to the activity to which the complaint relates”. (We examine what a "consumer" is in this context below.)

Note that complaints relating to a firm’s MiFID business are covered by different rules, which are not affected by this change.

Why does this matter?

For a number of reasons:

• Although, for most purposes, the FCA rules allow an asset manager to regard the fund as its client (and the fund, as mentioned above, would almost invariably be a professional client in its own right), the rules in DISP specifically look through to the underlying investors in the fund. The result is that the fund’s investors themselves can be eligible complainants (provided they tick all the necessary boxes).
• The definition of "consumer" in this context is “an individual acting for purposes which are wholly or mainly outside that individual’s trade, business, craft, or profession”. This, to some extent, overlaps that of "professional client". This means that some professional clients can now be eligible complainants.
• As a consequence of this, even asset managers who conduct business only in respect of professional clients will now need to check that none of their clients is, or could be, an eligible complainant.
• If you are conducting business for an eligible complainant (or have a reasonable likelihood of doing so), you can no longer claim the exemption from paying the FCA’s levy - and, if you have already claimed it, you would not only have to notify the FCA that the exemption is no longer applicable to you but pay a proportionate amount for the remainder of the current year’s levy.
• In addition, DISP contains a number of client disclosure and record keeping obligations which would now kick in and with which you would have to comply.

So, what do you need to do?

First, check whether you are affected by this change.

Are any of your clients "consumers" in respect of a regulated activity carried on by the firm and to which the complaint relates?

As mentioned above, for these purposes, a consumer is defined as “an individual acting for purposes which are wholly or mainly outside that individual’s trade, business, craft, or profession.”

You will need to confirm whether any client (including any underlying investor) could be said to be acting wholly or mainly outside their trade, business, craft or profession. In some instances, it will be clear that they are not but, in the case, for example, of high net worth individuals who are investors in the fund, it is likely that they will be acting as "consumers". Further information may be needed from the investor before you can take a view.

Be aware, too, that if you are carrying on the regulated activity to which the complaint relates and are doing so from an establishment in the UK, it doesn’t matter where the complainant is based, he or she can still make a complaint to the FOS.

If you find that you do now conduct business for eligible complainants (or have a reasonable likelihood of doing so)

In this case (and assuming you have been taking advantage of the exemption from having to pay the FCA levy available under DIPS 1.1.12R), you will need to:

• notify the FCA that you are no longer able to claim the exemption (this can be done by email to feetariffreturns@fca.org.uk).
• pay a fee towards the FOS general levy to cover the part of the year for which you will be subject to it
• in subsequent years, pay an annual levy as determined by the FCA (see its FEES Sourcebook for further information)
• review your policies and procedures (and update client disclosures and communications with your clients as necessary) to ensure that you comply with the various obligations under DISP, which include:
  • publishing appropriate information regarding your internal procedures for the reasonable and prompt handling of complaints
  • referring eligible complainants to the availability of this information:
  • providing such information in writing and free of charge to eligible complainants:
    • on request, and
    • when acknowledging a complaint.
  • providing information to eligible complainants, in a clear, comprehensible and easily accessible way, about the Financial Ombudsman Service including the Financial Ombudsman Service's website address:
    • on your website, and
    • if applicable, in the general conditions of your contract with the eligible complainant.