RegulationOct 25 2013

Rules for advisers accepting provider’s cash

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Retail Distribution Review rules ban the provision or receipt of benefits that could impair an adviser firm’s duty to act in the best interests of its client.

The regulator ruled out advisers accepting any payments from providers that are not designed to enhance the quality of service provided to a client and that are not clearly disclosed to clients.

Any arrangement that enables a provider to secure distribution by paying monies and providing other benefits to an advisory firm could inappropriately influence the advice received by a customer and cause a firm to breach Principle 8 (Conflicts of interest) and the COBS inducements rules.

Any joint venture between a provider and advisory firm must be consistent with the Retail Distribution Review and designed with the end customer in mind. So the FCA encouraged any firms considering launching such joint ventures to discuss their plans with the regulator’s staff.

All firms must undertake their business in line with the FCA’s 11 Principles for businesses.

Principle eight requires that a firm must manage conflicts of interest fairly, both between itself and its customers and between one customer and another client.

Once a firm has identified an actual or potential conflict, it must maintain and operate effective organisational arrangements to identify and take all reasonable steps to prevent conflicts of interest from constituting or giving rise to a material risk of damage to the interests of its customers.

If a firm is in a situation where it could receive a benefit but has yet to receive it, the FCA believes this is enough to impair the judgement of that firm, so the potential conflict needs to be managed in the same way as an actual conflict.

Any payments or non-monetary benefits made by providers to advisory firms connected with distribution give rise to the risk of conflicts of interest as they may incentivise a firm to act in a way that is inconsisten with the interests of its customers.

Should the payment or non-monetary benefit be offered or accepted the resulting conflicts are effectively managed if the risk of the firm putting its own interests ahead of the customer is removed.

Where an advisory firm operates a panel of providers, the inclusion of providers on the panel should not be influenced by the provider’s willingness and ability to purchase significant services from, or provide other benefits to, the advisory firm.

Exclusive distribution arrangements that advisory firms have with a single provider can give rise to conflicts. This is the case where the selection of the provider is influenced by sizeable payments or benefits the provider offers through service or distribution agreements and results in advisory firms putting their commercial interests ahead of their customers’ interests.

Longer term multi-year agreements between providers and advisory firms may have more potential to create conflicts of interest than short-term agreements.

These agreements often represent a significant revenue stream for the advisory firms concerned, and if the advisory firm is reliant on the ongoing revenue generated from such agreements to sustain its business, this has greater potential to create conflicts of interest.

The FCA is concerned about clauses that allow the provider to negotiate a reduced level of payments for a reduced level of services in the event that the provider loses its place on the advisory firm’s panel, or where there is a material reduction in sales of the provider’s products. Any such contract has the potential to inappropriately influence the advice given to customers, the FCA ruled.

Contracts between providers and advisory firms for services that generate a profit for advisory firms and are linked (whether directly or indirectly) to distribution of the provider’s products are frowned on by the FCA.

The FCA stated its rules do not prevent advisory firms from earning a reasonable profit (by charging a market rate) on services supplied to providers, but any profit increases the potential to create conflicts that need to be managed by firms.

Questions were raised about the FCA about staff in advisory firms’ functions that are responsible for providing information and guidance to advisers on the benefits and features of products, also having responsibility for the negotiation and provision of services to providers.

http://www.fca.org.uk/your-fca/documents/guidance-consultations/gc13-05