Despite the significant – and some would say little-acknowledged – effort that has gone into implementing the new rules, the regulators continue to accuse life providers and advisers of looking to find ways of circumventing them, by soliciting or providing payments that do not look like traditional commission, but have the same effect of securing distribution and causing advice bias.
It is now barely nine months since RDR came in and the FCA has found its first two scalps in its drive for credible deterrence. It announced last month that it has referred two life insurers to enforcement following its latest review, which involved it pouring over as many as 80 service and distribution agreements to establish whether they were within the spirit of RDR.
Clive Adamson, director of supervision for the FCA, said: “The changes we made to the retail investment advice sector were designed to mark a step change in the way advice was given. It signalled the end of advice that might be influenced by the commission payments made by product providers to advisory firms, and the start of a new era of trust and transparency between a firm and its customers. The findings of this review reveal that the actions of some firms have the effect of undermining the objectives of the RDR.”
What have firms got to do now? The FCA has made it clear that firms must review and, if necessary, revise their existing arrangements and warns that it will revisit this issue to see that the necessary improvements have been made. This means, first and foremost, reviewing the procedures that are applied by the firm when it is panelling, when it signs up a distribution arrangement, or an arrangement for support services. How are conflicts of interest identified and managed when preparing to enter into a service or distribution agreement?
The legitimacy of marketing support and other payment or benefit interactions with providers or advisers from an inducements or conflicts point of view has long been a regulatory issue for firms to grapple with, and more or less the subject of guidance, latterly in Cobs 2 – reasonable non-monetary benefits. However, the parts of the new draft guidance from the FCA about hospitality will be a good reminder of the importance of keeping relevant policies under review and making sure that practical controls and thresholds are applied to the giving and accepting of gifts and hospitality. Senior management buy-ins to this will be key.
Principle 11 provides an ongoing and open-ended responsibility for firms to keep the FCA informed about anything it would reasonably want to know.
The new draft guidance encourages firms entering into a contractual, or other joint venture or partnering arrangement, to consult the plans with the FCA at an early stage. Given the potential for the proposed venture to be delayed or turned down by the FCA response, this will be a devil-versus-the-deep-blue-sea decision for firms, although ultimately early consultation may save the firm legal and other costs, as well as help avoid an enforcement situation, which would be ultimately more costly in the long run.
As to the future, we can expect strong enforcement and increased consultation with the new and more interventionist regulator on distribution, joint venture and other arrangements to result in a bar to many arrangements of mutual benefit to advisers and providers, which would have been all right under the old order.
Acquisitive providers will need to tread carefully in looking for tie-ups with adviser firms and some believe that there will be an inevitable return to direct sales force activities by insurers. From the adviser side, moving to a cost-only approach limits provider payment for adviser training, and so on, and will have a material impact on advisers whose business models currently rely on product provider value add ons.
Sarah Boswall is senior counsel at law firm Bond Dickinson
