This morning’s guidance consultation drew a lot of well-deserved attention. Now that we have all had a chance to digest it, here we highlight the key issues raised by the paper as well as a few details you may have missed.
Advisers must be whiter than white
One important thing to keep in mind here - and perhaps a sign of a more active regulator - is that the FCA does not care if you are actually being influenced by payments or other inducements from providers. It is equally concerned over ‘potential’ conflicts.
My colleagues and I have close hand experience of this; it is the same logic that has spurred the Financial Times to implement stricter policies in the wake of the Anti-Bribery Act, meaning we could no longer accept the majority of gifts or, for example, any travel or accommodation from the firms we write about.
Essentially, it is better to be visibly in the clear just to be absolutely sure. Over-comply to ensure your compliance is explicit.
Slightly less cynically one might argue that with trust in financial services having been so sorely undermined by the misbehaviour of banks and others in the last few years, the FCA is keen that the sector show itself to be ‘whiter than white’.
Beware both the carrot and the stick
Much of the focus in coverage of the inducement draft guidance has been on the positive inducements: lavish holidays, slick training packages and cutting-edge IT upgrades. This is to be expected, after all these are a few of the more glamourous inducements.
However, one passage in the guidance consultation points out that there can also be negative inducements and that these are just as serious (albeit less fun).
Some contracts contain clauses that would allow a provider to negotiate a reduced level of payment or services if the provider loses its place on a product panel, or where an adviser puts less business towards them. Obviously this axe hanging over the adviser firm’s figurative head could very easily sway its business decisions irrespective of what is best for clients.
In cases like this, not only would the firm not get to enjoy the (temporary) benefits but it would also be threatened with the withdrawal of payments or services that it might have mistakenly come to lean on.
It is this “crutching” by adviser firms that the FCA is especially looking out for. If the success of your business relies on a constant stream of revenue from one or more providers, it might be time for a re-think.
Beware the wrong type of profit
The regulator wants to be completely clear: it is not meddling in the free market.
A sub-section of the paper explicitly states: “Our rules do not prevent advisory firms from earning a reasonable profit (by charging a market rate) on service supplied to providers, but any profit increases the potential to create conflicts that need to be managed by firms.”