The Main Changes in the 2024-25 CII R01 Study Text – Part 2

Here, in the second of a two-part series, we take a look at the main changes that you’ll come across in the second half of the 2024/25 version of the CII’s R01 study text. This article is particularly relevant to the R01, R06, and AF5 exams.

This article is correct as at 6 August 2024 and is relevant to the 2024/25 examinable tax year.

R01, Chapter 6

Remuneration Code

The Remuneration Code has been updated and now refers to SYSC 19F and SYSC 19G:

Remuneration and Performance Management (SYSC 19F) 

These are the remuneration rules for firms which do not fall within the MiFID investment firms categorisation. Firms must ensure that staff compensation and performance evaluation do not conflict with the obligation to prioritise clients’ best interests. They must avoid remuneration arrangements, such as sales targets, that incentivise recommending inferior financial products to retail clients when better alternatives are available. 

MIFIDPRU Remuneration Code (SYSC 19G)

The remuneration policies and practices in SYSC 19G apply to both SNI and non-SNI MIFIDPRU investment firms.

Remuneration policies must be proportional to business risks, gender-neutral and compliant with the Gender Equality Act (2010), and align with sound risk management and the firm’s long-term strategy. They should prevent conflicts of interest, promote responsible conduct, and enhance risk awareness.

CASS

In addition to client money reconciliation being done ‘as often as is necessary’, the study text now states that it must be done at least at intervals of no more than 25 days, with discrepancies corrected by close of day on the day reconciliation is performed. The reference to the FCA’s expectation that this should be done daily has been removed.

PROD

This has been updated to include consideration of the requirements in ESG 4 (distribution of products with sustainability labels.) 

Sustainability Labelling, Naming and Marketing (ESG 4)

The Sustainable Disclosure Requirements (SDR) introduced four sustainability labels for investment funds: Sustainability Focus, Sustainability Improvers, Sustainability Impact, and Sustainability Mixed Goals.

Firms must review their eligibility for these labels at least annually and stop using them if criteria (see below) are no longer met. Managers must notify investors if they lose eligibility and use labels accurately without implying FCA endorsement. Firms must also provide retail clients with relevant disclosures, consistently communicate the correct label, and update financial promotions as needed. Rules apply to both investment managers and distributors, including advisers.

When recommending an overseas investment not subject to UK regulations but containing restricted terms, advisers must include a risk warning.

Sustainability Label Criteria (general):

• Explicit Objective: Clear, specific, and measurable sustainability objective aligned with the label.
• 70% Rule: At least 70% of assets must be invested according to the sustainability objective, with some exceptions.
• Robust Standards: Assets must meet a robust, evidence-based standard of environmental and/or social sustainability.
• No Conflicts: Non-aligned assets must not conflict with the sustainability objective.

Managers must adhere to rules ensuring the robustness of sustainability characteristics in their investments, including stewardship activities and required resources.

Individual labels:

The Anti Greenwashing Rules (ESG 4.3.1)

All firms must ensure communications with clients and financial promotions regarding sustainability reflect the actual sustainability characteristics of the product or service and are fair, clear, and not misleading.

Managers face additional requirements when using specific terms in fund names or financial promotions aimed at retail clients.

The ASA has published guidance on misleading environmental claims and social responsibility.

Non-Labelled Products

Managers involved in sustainability activities who do not apply for a sustainability label can use related terms with additional disclosures.

They may not use terms like ‘sustainable’, ‘sustainability’, or ‘impact’ in fund names or descriptions.

These funds must provide customer-facing disclosures explaining the purpose of sustainability labels, the absence of a label, and reasons for not having one.

Disclosure of Sustainability-Related Information (ESG5)

Consumer-Facing Disclosures

• Maximum two A4 pages.
• Sustainability objective clearly defined as the ‘sustainability goal’.
• Explanation of any material effects on financial risk and return due to the investment strategy.
• Report on product’s progress towards achieving its sustainability objective.
• Disclosure of any adverse environmental or social outcomes linked to pursuing sustainability.
• Specification of the label used for the product.
• Investment Policy and Strategy Summary.
• Explanation of manager’s approach to sustainability.
• Clarity on assets the product will and will not invest in based on sustainability criteria.
• Explanation of types of assets invested in for reasons other than sustainability objectives.
• Description of the manager’s stewardship practices.
• Outline of key indicators or metrics used to evaluate if the product is achieving sustainability goals.

Pre-Contractual Disclosures (ESG5.3)

Detailed information including whether the manager adheres to the UK Stewardship Code and details about index tracking methodology used for index investments. Aims to enhance transparency and inform potential investors about the manager’s stewardship practices and investment strategies.

Sustainability Reports (ESG 5.4)

Annual reports:

• Product-Level Report: Shows fund’s progress towards sustainability goals and performance against KPIs. Provides context for retail clients to interpret assumptions.
• Sustainability Impact Funds: Must also demonstrate how assets achieve measurable positive environmental or social outcomes.

R01, Chapter 7

Part III of the RAO

A handful of new items have been added to the RAO:

• greenhouse gas emissions allowances and emission allowances;
• funeral plan contracts; and
• rights to or interests in investments.

Consumer Duty Responsibility

Firms are expected to appoint a Consumer Duty ‘Champion’ at Board or governing body level. Although not a ‘prescribed responsibility’ under SM&CR, this role is meant to ensure the Consumer Duty is regularly addressed in discussions and to challenge the firm’s governing body on its implementation throughout the organisation.

Additional CPD Requirements

Where pension transfer specialists need an additional 15 hours of CPD, at least 5 hours of this must be provided by an external independent provider.

Money Laundering

When using electronic sources or digital identity services, companies must be able to prove that they have verified the customer’s existence and confirmed that the person seeking the business relationship is indeed the individual being verified.

Data Protection

Transfers of data to employees of a sender located outside the UK, or between entities within the same legal group, are not classed as international data transfers.

Before using foreign online data processing services, firms must ensure they have informed Data Subjects about the possible transfer of their data outside the UK and the potential loss of protections, regardless of the companies’ claims of GDPR compliance.

FSCS

Annuities added under the pension heading, with protection at 100% of the claim.

R01, Chapter 8

Consumer Duty

The consumer duty content has been expanded slightly, bulking out the outline of the information that was already in the study text.

Advice Guidance Boundary Review

This review presents three main proposals: clarifying the advice-guidance boundary, introducing a targeted support regime, and implementing a simplified advice regime. These initiatives are designed to help consumers make better-informed decisions about their investments and pensions by bridging the gap between professional advice and general guidance.

Promotions

Those creating financial promotions must consider the extra requirements specified in the anti-greenwashing rule outlined in ESG 4.3.1R, as well as the additional guidance provided by the FCA on this topic.

Ethical, Religious and Sustainability Preferences

The FCA highlighted in PS23/16 that customers often struggle to find products that match their specific sustainability preferences. New labelling regulations aim to improve consumer understanding of the market, but advisers must actively inquire about their clients’ preferences to ensure the advice provided aligns with their goals and values.

While a firm may focus on specific product markets like ethical and socially responsible investments, all advisers are responsible for understanding these preferences and how they impact the suitability of their advice.

Under the Consumer Duty, firms are obligated to assist retail customers in achieving their financial objectives, including those related to sustainability preferences in their investment goals.

Ongoing Monitoring and Reviews  

Clients should understand what they are paying for and how ongoing reviews will be conducted.

Regular and effective reviews can help identify if a client has become vulnerable and needs additional support.

When firms maintain an ongoing relationship with clients, they must act to prevent foreseeable harm throughout the product or service lifecycle.

The importance of continuously monitoring and periodically reviewing suitability is underscored in the FCA’s Thematic Review of Retirement Income Advice.

R01, Chapter 9

Consumer Duty

According to the Consumer Duty, firms must communicate with clients in a manner that enables them to make well-informed decisions about financial products and services promptly and effectively. The firm should provide consumers with all necessary information in a clear and timely manner so they can assess:

• The available options to them.
• The costs, risks, and benefits associated with those options.
• Which option would best meet their needs and provide fair value.

R01, Chapter 11

A section on AI safety has been added. Data ethics and AI safety are emerging issues that pose significant questions about the ethical use of data and analytical software, particularly within sectors like financial services. These issues encompass several ethical considerations, including:

• consent;
• privacy;
• equality; and
• transparency

Key Components of a Firm’s Culture

The term ‘practices’ has been replaced with the phrase ‘rewarding and managing people’.

Grab the resources you need!

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Alternatively, you can download the taster for AF5 or R06 if one of those exams is on your horizon.