FSA sets out rules for Government's Child Trust Funds

The new and amended rules, set out in the policy statement, come into effect on 1 December and follow consultation with the industry, trade associations and consumer groups. The consultation focussed on how the FSA's rules could help to ensure: that consumers have the information they need about CTFs; that firms have the systems and controls in place to deliver the CTF; that they can handle a potentially high volume of accounts; and that their CTF business is backed by appropriate financial resources.

Dan Waters, FSA Director of Retail Policy said:

"In many ways Child Trust Funds are a unique financial product. Our regulations are designed to ensure that all consumers have the information they need to make properly informed decisions, whether they are experienced investors or those less familiar with savings and investment products.

We have also looked closely at ways of keeping the guidelines for industry simple and low cost to maintain an efficient market."

The main changes to the rules as originally proposed include:

• addition of new rules aiming to ensure adequate disclosure in point of sale material for all types of CTF. This includes a requirement, where relevant, for a prominent statement to alert consumers to the product they are opening, detail of what it is and a balanced comparison between the stakeholder and non-stakeholder CTF. It also includes the risk warning that, once subscribed, money cannot be taken out of the CTF by anyone other than the child at age 18;

• a number of changes to the cancellation rules to clarify firms' regulatory obligations.

There will be two types of CTFs available to the consumer: a stakeholder and a non-stakeholder. The new FSA rules mainly apply to the stakeholder products which will be equity-based accounts with statutory minimum standards. Non-stakeholder products may be either equity-based accounts or cash deposit accounts without the minimum standards and on the whole existing rules will continue to apply.

CTFs will be available from April 2005 when children born on or after 1 September 2002 will receive an initial government contribution of at least 250 to open their CTF.

Notes for editors

1. In October 2003, the government announced its detailed proposals for Child Trust Funds. Legislative effect has been given to CTFs through the Child Trust Funds Act 2004 and the Child Trust Fund Regulations 2004.

2. From January 2005, CTF vouchers will be sent to those children entitled to a CTF. As of that time, firms will be able to start processing CTF applications but will not be able to accept subscriptions until April 2005.

3. The statutory minimum standards for stakeholder Child Trust Funds include:

   • penalty-free transfers between accounts and between CTF providers (except for stamp duty and dealing expenses);

   • minimum subscriptions of 10;

   • asset diversification and 'lifestyling'; and

   • an annual management charge capped at 1.5% of fund value.

4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.

5. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.