I think many of us had the suspicion it was all going a bit too well with the RDR, and the FCA confirmed it last week with its surprise announcement that two life insurers were being referred for possible enforcement action over their use of inducements to influence sales.
It would be wrong to speculate on the culpability of the insurers concerned but it is clear there has been some apparent evidence of wrongdoing. The FCA will not find it easy, however, to get to the bottom of the matter.
The FCA said that inducements risk “undermining” the objectives of the RDR and I am in full agreement with them on that. Unfortunately, hidden inducements have always been a part of the financial services scene, however much people refuse to admit it. Always whispered about and rarely discussed in public, they are a form of hidden commission kept from public view.
It would be naive to imagine that the regulator could ever ban all inducements but it is right to act to avoid these ‘incentives’ driving a stake through the heart of the RDR.
In the many years I have been writing about financial services, I have always found uncovering information on the provision of inducements one of the hardest nuts to crack. In the days before the regulators paid attention it was, as I understand it, common for some IFA networks, in particular, to seek and often receive huge inducements, promising in return a certain level of sales that would be ‘siphoned’ in the direction of the paying provider.
These were difficult to track but could include, for example, offers to pay for conferences, back office support, staff training, IT and the like. Conversations along the lines of “you pay for our annual conference and we’ll make sure you get x thousands of pounds of business” were allegedly not uncommon. On more than one occasion providers complained to me, without names being mentioned, that they often felt pressured by some firms and networks to hand over money or face losing business. It was rife.
So I was not surprised when the FCA announced last week that this was still going on and it was finally cracking down on it and not before time.
The FCA said some of the inducements it was looking at included: “IT development and maintenance, staff training, conferences and seminars, hospitality, research and promotional activities.” In others words, pretty much most of the dodgy stuff that had gone on in the pre-RDR days.
The real issue here is how does the regulator monitor these hidden inducements in future? The FCA has been posing lots of questions and asking a number of providers and advisers to fill in questionnaires. In all the FCA looked at 26 insurers and advisory firms and a total of 80 agreements. While only two firms have been referred for possible disciplinary action the FCA does admit that “many of the firms involved in this review have now changed their arrangements as a result of early action by the FCA” so it appears the questionable behaviour may have been pretty widespread. I suspect in many cases this was an example of “old habits die hard” but at least the FCA has acted.
It will, however, need to keep up momentum. Providers and advisers should be made to keep a register of all payments made and received to and from third parties where a potential conflict of interest could occur.
Providers and advisers should be made to keep a register of all payments to and from third parties where a potential conflict of interest could occurIn the meantime, all this will unnerve consumers and consumer lobbyists once more. They will ask: what are these hidden inducements, how widespread are they, why have they continued and what continuing efforts are being made to stop them.
These questions are all fair but I suspect it will be a very long time, if ever, before all inducements in financial services are eradicated.
Even so, consumers have a right to know what influences there are on any sale or recommendation made to them by their adviser and why one product or provider is being pushed over another. It goes to the heart of the integrity of good and impartial advice. Hidden inducements are just as bad, if not worse, than visible inducements such as commission. At least if you knew what commission was being paid you could factor that into your decision-making – with hidden inducements you have no chance.
All of this has me wondering, and I am sure other commentators too, as to whether it will ever be possible to clean up financial services to the level where everything is clean and transparent. I always smile when I see reference made at the moment to platforms moving to “clean share classes” on funds and investments as if this were somehow an additional benefit they were offering consumers. There is still a long way to go.
Kevin O’Donnell is a financial writer and journalist
YouSaid: RobertDavies1 in response to Gill Cardy’s column on the withdrawal of mass market advice from the banks (FA, 19 September)
Does Ms Cardy really think a first meeting with a client will take an hour, presenting your terms of business, explaining adviser charging, doing, or bringing up to date the factfind with current data - up to date docs, attitude to risk questionnaire, then discussing needs, then perhaps driving home having got there by car anyway? Even if you prepare the client by phone, would that take one hour?
A simple case four hours perhaps, a term assurance, but a multiple pension transfer or an impaired annuity or drawdown? Hours? Days more like.
