RegulationSep 18 2013

FCA: Inducement clampdown due to increase in values

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The Financial Conduct Authority would not have clamped down on inducements, which it stated were “normal” prior to the Retail Distribution Review, were it not for the fact that the value of these inducements has been “stepping up considerably”, the regulator has said.

A review conducted by the FCA and published today (18 September) found that advisory firms and life companies are “undermining” the principles of the RDR by continuing to solicit and receive “inappropriate” payments that circumvent the ban on commission.

In an interview with FTAdviser, Nick Poyntz-Wright, director of long-term savings and pensions at the FCA, said that although it was previously considered “quite normal”, especially for the larger advisory firms, to have distribution agreements in place, the value of such agreements has been rising in value.

He said: “Suddenly the level seemed to step up significantly just at the point where the RDR was coming in and commission was no longer going to be there”.

Mr Poyntz-Wright refused to disclose the actual financial amounts of the inducements identified as part of the review.

He said: “These kinds of agreements have been in the market for many years but what we did see during the course of last year and through the work that we’ve done is the value of these agreements were suddenly stepping up considerably, to a point where you could see that the amount involved were a very significant increase.

“What you could see was that the levels in total were going to be material to the advisory firm that was receiving them.”

He said this was the driver for the review and it appeared there were “payments going around the edges which were not commissions but had the same potential effect”. He added that outcomes for customers could be adversely impacted by these arrangements.

Mr Poyntz-Wright said: “What we found disappointingly is out of 26 firms that we engaged with, more than half of them were involved or are involved in agreements where we had some concerns. That is not a good result.”

Two firms were referred to enforcement in specific cases where the FCA identified potential rule breaches.

He said: “We are already seeing from the interaction we are having with the firms that we have engaged with and also the trade associations, a body of support behind this to say actually we need to get our act together and move forward in a different direction.”

Mr Poyntz-Wright added that the FCA does not rule further enforcement actions, highlighting that the regulator will continue monitoring this area.

He said: “I think what I would say in the discussions we’ve had with firms where we’ve found issues is, in many cases, they’ve begun to make those changes and also that there is a body of support growing behind this so hopefully the industry will move forward together on this but we will keep it under review and see how it moves.”