Five things I learned from the FCA’s inducement paper

Advisers must be whiter than white

One important thing to keep in mind here - and perhaps a sign of a more active regulator - is that the FCA does not care if you are actually being influenced by payments or other inducements from providers. It is equally concerned over ‘potential’ conflicts.

My colleagues and I have close hand experience of this; it is the same logic that has spurred the Financial Times to implement stricter policies in the wake of the Anti-Bribery Act, meaning we could no longer accept the majority of gifts or, for example, any travel or accommodation from the firms we write about.

Essentially, it is better to be visibly in the clear just to be absolutely sure. Over-comply to ensure your compliance is explicit.

Slightly less cynically one might argue that with trust in financial services having been so sorely undermined by the misbehaviour of banks and others in the last few years, the FCA is keen that the sector show itself to be ‘whiter than white’.

Beware both the carrot and the stick

Much of the focus in coverage of the inducement draft guidance has been on the positive inducements: lavish holidays, slick training packages and cutting-edge IT upgrades. This is to be expected, after all these are a few of the more glamourous inducements.

However, one passage in the guidance consultation points out that there can also be negative inducements and that these are just as serious (albeit less fun).

Some contracts contain clauses that would allow a provider to negotiate a reduced level of payment or services if the provider loses its place on a product panel, or where an adviser puts less business towards them. Obviously this axe hanging over the adviser firm’s figurative head could very easily sway its business decisions irrespective of what is best for clients.

In cases like this, not only would the firm not get to enjoy the (temporary) benefits but it would also be threatened with the withdrawal of payments or services that it might have mistakenly come to lean on.

It is this “crutching” by adviser firms that the FCA is especially looking out for. If the success of your business relies on a constant stream of revenue from one or more providers, it might be time for a re-think.

Beware the wrong type of profit

The regulator wants to be completely clear: it is not meddling in the free market.

A sub-section of the paper explicitly states: “Our rules do not prevent advisory firms from earning a reasonable profit (by charging a market rate) on service supplied to providers, but any profit increases the potential to create conflicts that need to be managed by firms.”

Firms earning especially plump profits will find themselves the subject of FCA scrutiny.

In the interests of clarity I should note here that the FCA is specifically talking about a firm making the “wrong type” of profit, namely that from providers rather than clients.

I can see their point, but I have to wonder if this will result in adviser firms having to push up costs even further? It wouldn’t be the first time a bid for better consumer outcomes resulted in a rise in the cost of advice.

Beware your own staff

If worrying about the “wrong type” of profit was not enough of a headache, the FCA is also concerned that advisers’ own staff members could be working intentionally or otherwise to undermine its focus on client outcomes.

In its guidance consultation, the FCA warned that staff in adviser firms who are responsible for informing at-the-coal-face advisers of the pros and cons of certain products may also be the ones negotiating services to providers.

The paper said: “This may create conflicts because staff in these functions might be unduly influenced to ‘push’ the products of those providers paying for services, and to discount those products from providers not purchasing services.”

When it comes to adviser firms, the right hand really should not know what the left hand is doing.

I imagine larger firms will have little trouble implementing these controls by assigning conflicting tasks to different members of staff. However, how will a one-man band or small firm guard against this type of internal influence? Will the regulator take such inevitable conflicts into consideration when it comes knocking?

The bottom line: Slow train coming

If you take one thing from this article, realise how wary you have to be of potential conflicts of interest and how you can evidence your unbiased ways.

If you take a second thing, remember how long this review has been coming. While the regulator has been railing against incentivised product bias for yonks and thus banned commission, others have been warning over problems posed, for example, by restricted product panels, which were obviously covered by this review.

Indeed, FTAdviser warned against the risk that restricted models that relied on panels constructed on the basis of commercial arrangements might undermine the RDR project back in March 2012.

But it has taken a long time for the FCA to finally bring its sights to bear on the topic. Part of this might be an effort to catch up to all the projects the Financial Services Authority began but did not complete, and part of it might be the FCA trying to demonstrate how swift it intends to act.

The moral of the story here is just because something has not been addressed yet does not mean the regulator is ignoring it. We will almost certainly be writing about the RDR after-effects for some time yet.