Undocumented dealings are frowned-upon in any industry. Consumers like transparency and dislike it when they feel that intermediaries have an ulterior motive. In financial services, it is to the benefit of the client that an adviser has a positive relationship with providers. But, they become wary when this borders on coercion.
The Retail Distribution Review (RDR) was introduced to make financial services fairer. Changes to adviser charging structures caught consumers’ attention, as did the requirements to keep up with continuing professional development (CPD).
One area that the RDR failed to address directly in its effort to improve transparency was inducements. At the beginning of 2014 the regulator issued another set of rules aimed directly at the issue, making it clear that any potential conflicts of interest must be eliminated in the interest of the consumer.
You scratch my back…
Incentives from providers can come in many forms, from a simple lunch to an extravagant weekend away, but any payment or benefit which could be perceived as encouraging an advisory firm to favour one product provider over another, therefore undermining the aims of RDR, could be considered an inducement.
In its guidance, the FCA states that “payments from product providers to advisory firms should be based on reasonable reimbursement for the costs incurred by advisory firms” and that “any such payment should always enhance the quality of service provided to customers”. This means that any benefits or payments should be to make up for income lost in the time that it took for the adviser to meet with the provider – no more.
Undoubtably, pressure from companies continues, though may be abating thanks to the guidelines. Kunal Ariyawansa, chartered financial planner at Appleton Gerrard Financial Planning, says of his experience with providers, “I have felt pressure in the past – however, this has decreased recently.
“Several years ago I was informed by one business development manager that, unless some interest was shown in recommending their – usually higher risk – products he would have to focus on his ‘more productive’ relationships. Since these products were not recommended, not only did the manager stick to his word, invites to their complimentary events also ceased.”
Jane Hodges, chief operating officer at Alexander House Financial Services, echoes the sentiment, and recalls how, in the past, providers would provide direct financial support to advisory practices with the expectation that their products would be recommended. Smaller IFA businesses, with less distribution power, would receive less attention, but still receive a number of “inducement-led” interactions.
