The RDR is being undermined by advisers and providers persisting with inducements, according to the regulator.
Issuing a guidance consultation paper – ‘Supervising retail investment advice: inducements and conflicts of interest’ – the FCA said it has “serious concerns” and that a poor management culture in some firms is undermining the objectives of the RDR. More than half the firms it sampled had agreements in place that could breach inducement rules, it added, meaning that “advice to customers may be inappropriately influenced by the existence of such agreements”.
The ban on commission was intended to stop any potential influence of rates offered on the recommendations provided, and it was this area that caused the most outcry when the review was announced.
However, the regulator has found other relationships and agreements between providers and advisers to be tantamount to preferential treatment. Two firms have been referred to its enforcement division for potential rules breaches, one of which has been confirmed as annuity specialist Partnership.
The insurer has a £15m deal with Openwork to be its sole annuity provider. Openwork said it is not the second firm under investigation. Partnership bought a 50 per cent stake in Gateway Specialist Advice Services, part of Sesame Bankhall Group, in 2010. Sesame would not comment on whether it was also under investigation.
Although the work was carried out on life insurance firms and advisory companies, the regulator stated that its consultation also applies to all providers offering retail investment products.
Concerns of the regulator are largely focused on inducements of various types, in areas that potentially affect many advisers. The use of panels has been widely supported, for example, with it understood that advisers could create and review a panel of providers on an ongoing basis. However, the FCA found one example where life companies provided additional significant support to an advice firm, with the firm then only selecting those life companies for its panel.
This is a warning sign for all advisers that have financial arrangements with panel members: the regulator will consider links with other areas of the business, such as training and IT support, in concluding whether the advisory firm receives disproportionate financial benefit for including the provider in question.
The FCA is seeking responses to its consultation by 18 October.
Examples of poor practices uncovered
1. Longer term multi-year agreements between providers and advisory firms may have more potential to create conflicts of interest than short-term agreements.
2. 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.
3. 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.
4. 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.
