This morning (18 September) the Financial Conduct Authority published another paper introducing the findings of its latest review into whether advisers and providers are meeting the heightened standards demanded by the Retail Distribution Review rules.
Again, it uncovered serious shortcomings. Providers are still offering - and advisers are soliciting and accepting - payments that the regulator says are nothing less than ‘inducements’ to place business with one firm over another.
This, it states, undermines the objectives of the RDR, the central tenet of which was a ban on ‘commission’ to remove product bias.
Here FTAdviser outlines five key ‘inducements’ that the FCA identified as creating a “conflict of interest” between advisers and providers and evidenced intermediaries placing their own commercial interests ahead of the best interests of their clients.
1) Long-term agreements
Long-term agreements between advice firms and product providers are a more fertile spawning ground for conflicts of interest than shorter-term alternatives, the Financial Conduct Authority warns.
The regulator is particularly concerned that multi-year agreements, for example relating to a provider’s presence on an advisory firm panel, often represent a significant revenue stream for the adviser and, if the firm comes to rely on that income to sustain the business there is a greater risk of this producing a serious conflict of interest.
The consultation notes: “Our 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.”
Essentially, greater profit leads to greater risk and advisers should be limiting the length of time agreements operate over, even where this reduces their commercial value.
2) Non-monetary benefits
The regulator is concerned with potential as well as actual conflicts of interest, including monetary and non-monetary benefits. One area of particular concern is firms’ interpretation of a section of conduct of business rules outlining the types of benefits that are allowed due to resultant client benefit.
Specifically the FCA repeatedly refers to Cobs 2.3.15G, which provides a table of non-monetary benefits firms are able to accept. The list comprises of items such as gifts, promotional competition prizes, as well as joint marketing initiatives and promotion.
The FCA found firms take an “overly broad” interpretation of this table to justify a wide range of benefits.
Firms must assess each benefit before accepting it to ensure it complies with the inducements rules. Also, firms must disclose to customers any benefits paid or received.
3) IT system upgrades
Concerning IT systems, the FCA warns that any payments from providers to enhance an adviser firm’s general IT system to make it compatible with the provider’s own systems are likely to be on a scale conducive to conflicts of interest.
However, if providing or receiving a proportionate payment towards systems specifically necessary to feed information into a provider’s IT systems does not adversely effect customers, this could be acceptable under the FCA guidance.
Also, a provider giving adviser firms training on its products is unlikely to impair advisers’ judgement if that training is open to all advisory firms who could recommend the providers’ products or services.
4) Hospitality
Hospitality is identified as a trickier field. The FCA says it uncovered instances of advisers taking multi-day overseas trips with spouses or family which were paid for in large part by providers.
If attendance at these events was related to the level of business an adviser lodged with a provider, a clear conflict of interest exists. Firms can mitigate the risk of conflicts by having an approved person assess what constitutes reasonable hospitality, the FCA notes.
5) Payments for management team access
Finally, payments from providers to advisers for meetings with advisers’ management teams are at high risk of producing conflicts which put the firm’s commercial interests ahead of the clients’.
The regulator suggested firms should restrict payments accepted solely to reasonable costs incurred in in arranging and hosting the meeting. In general, most costs are acceptable in this way: reimbursement for costs is within the rules, but “disproportionate” costs will be viewed as a cause for concern and potential conflict.
