RegulationOct 30 2014

Six key points from Sesame’s final notice

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Earlier today (30 October) the Financial Conduct Authority handed Sesame its fourth fine in a decade, this time a £1.6m penalty over inducements requested for providers to be included on its restricted panel.

Here we run through the six key issues that came out of the final notice and interview with SBG’s executive chairman.

1. Sesame had been warned...

The FCA was particularly unhappy because it had published a swath of materials reinforcing its views in this area in the lead up the RDR.

In 2004 the regulator published a ‘Dear CEO’ letter warning that up-front payments as a pre-condition for appointment to an advisory firm’s panel were inconsistent with its standards of conduct.

In June 2012, the FCA published an online newsletter with advice for retail investment firms affected by the RDR, referring to its concerns that firms were looking to circumvent the adviser charging rules and warning that it would take the necessary action to prevent this.

Later that year, the FCA undertook a thematic project into payments made by providers to advisory firms, during which it sent a number of communications through to 2013 expressing concerns over the service agreements.

Finally, in September 2013, the FCA issued a guidance consultation on inducements and conflicts of interest.

2. ...and is a serial offender.

As the FCA points out, in June 2013 it imposed an £8.6m financial penalty - reduced to a little more than £6m on early settlement - for failing to take reasonable care to ensure the suitability of its advice for customers in relation to sales of Keydata bonds.

In April 2007 the regulator imposed a penalty of £330,000 for failures in relation to its complaints handling of structured capital at risk products (Scarps), while in October 2004, the FSA fined Sesame £290,000 for failing to adequately monitor the selling practices of an AR.

That this is the fourth fine was an aggravating factor which bumped up the eventual penalty significantly.

3. It asked very leading questions in tender invitations...

Sesame launched the restricted advice proposition in July 2012, with panels for different product markets, including pensions, at retirement and investment product ranges.

It expected providers to support the proposition’s development by purchasing services, paying for the training of advisers, development of IT systems and promotion to the market. Sesame expected providers to commit to these service agreements for a five-year terms.

The most egregious factor seems to have been the various invitations to providers to pitch for services, which asked questions like:

• “What sales and marketing support (over and above normal activity) would you offer to ensure the benefits of [sic] this proposition can bring are maximised?”

• “What ability do you have within the value chain to make payments to [the Sesame group] for the provision of certain services traditionally supplied by the provider?”

• “We anticipate entering into long term agreements with selected partners (at least five years). Please indicate the key contractual obligations and benefits envisaged.”

4. ... and even demanded more money.

In one particularly revealing case, a provider had included details of what it would buy in terms of services between 2012 and 2016, and was told to add a further £750,000 to secure its place on the panel for the years between 2014 and 2016. There is no hiding place there.

5. The conflicts were long term

As the final notice states, instead of ensuring that it paid due regard to its clients’ interests, Sesame acted in favour of its own commercial interests and did not manage - fairly or at all - the conflict of interest between its commercial interests and its customers’ best interests.

In particular, the FCA singled out the “long term multi-year nature” of the service agreements between Sesame and providers. Executive chairman John Cowan told FTAdviser that these deals are legal contracts and therefore it “can’t just tear them up”.

6. Aggravating factors pushed the fine up considerably.

How did the FCA come to its number?

The period of Sesame’s breach was from 1 January 2012 to 31 January 2014, in which the total revenue was deemed to be £16.3m. As a ‘level three’ breach - out of a five level scale which equates to fines of between 0-20 per cent - the figure was set at 10 per cent of that revenue.

But the aggravating factors outlined above, including the previous fines, partially offset by the fact it engaged an independent third party to undertake a review of the services it offered and then voluntarily withdrew some, was enough to increase the fine by 40 per cent to £2.3m.

Of course, the FCA and Sesame then reached agreement, so a 30 per cent discount applies.

peter.walker@ft.com