Q53A. Is a child trust fund (a CTF) a financial instrument?
No. A CTF account itself is not a financial instrument. The funds contributed to a CTF may be invested in financial instruments. However, in the FCA's view, the link between the underlying investment and the rights and interests acquired by the CTF account holder is too remote for the account holder to be considered as having acquired the underlying investment itself. So, the provision of services to a CTF account holder (such as in relation to the establishment of the account and the making of further contributions) will not be an investment service.
Q53B. Will the operator of a CTF be carrying on investment services or activities?
Possibly, but it is likely that it will not be an investment firm as defined in the Regulated Activities Order or any of the other kinds of investment firm listed at the start of this chapter. Where the CTF is invested wholly or partly in financial instruments, the operator may be providing an investment service when it executes the transaction or arranges to transfer funds to a new financial instrument (such as a security or collective investment scheme unit). However, in the FCA's opinion, the exemption in paragraph 1(d) of Part 1 of Schedule 3 to the Regulated Activities Order (see Q39) should be available to CTF operators.
The key question in applying this exemption is whether the investment services are incidental to the other activities involved in operating a CTF when viewed on a global basis. In the FCA's view, this is likely to be the case as most CTFs do not involve active trading, such as day trading, by the account holder and, as a result, involve little or no ongoing investment service.
An issue arises as to whether a focus on deal-based charges as the main source of remuneration (instead of charges related to the administration of the CTF itself) might indicate that trading is not incidental. In this respect, the FCA would expect firms designing an account in this way to follow the principle of treating their customers fairly. For example, firms may want to explain to potential account holders the possible impact of frequent switching if this incurs costs and erodes capital. More generally, where active trading is likely to have a detrimental effect on capital value, it may well be that this would be viewed as more than an incidental activity such that the exemption would not apply.
It is necessary to balance investment services against all the activities that are not investment services that have taken place or will take place in the CTF accounts that the firm operates over their full term. The FCA would not expect firms to have to investigate each CTF on a trade-by-trade basis. The exemption may still apply even if particular accounts experience higher levels of dealing activity.
Q53C. Is a person who provides services relating to investments that underlie the CTF an investment firm?
Possibly. Firms which provide investment services to the CTF operator in relation to financial instruments held within the CTF account (such as executing trades) will be an investment firm unless an exemption applies to them.
Q53D. Does the same analysis apply to other types of schemes where financial instruments may be held for the benefit of investors such as an ISA or a pension scheme?
This depends on the nature of the scheme in question. CTFs have very particular product features. Other types of schemes such as ISA accounts may simply be tax efficient ways to hold the beneficial interest in financial instruments which may, at the behest of the account holder, be transferred into their direct ownership. So, the beneficial interest that an investor acquires in a share, bond or collective investment scheme unit held under an ISA will be a financial instrument. And the operation of an ISA will essentially be an investment service such that the exemption in paragraph 1(d) of Part 1 of Schedule 3 to the Regulated Activities Order will not be relevant. Pension schemes, on the other hand, bear a closer similarity to CTFs in that they will have particular product features and the underlying investments are held for the purpose of providing or determining the value of the member’s cash benefits. Generally speaking, a member of a pension scheme can only transfer the value of their benefits and not transfer the underlying investments into their direct ownership. For this reason, as explained in PERG 10.4A, the FCA does not consider that a member of a pension scheme acquires a financial instrument purely as a result of having a financial instrument held for their benefit under the trusts of an occupational or personal pension scheme.