The Financial Conduct Authority recently launched a guidance consultation on inducements and conflicts of interest in the advisory sector in the wake of research that indicated some bad practice in the industry.
In two examples the FCA stated practice was so bad that the firms were referred for enforcement.
It reviewed service agreements between advisory firms, support services businesses, networks and providers and provided case studies such as an advisory firm that secured substantial payments from a number of life insurers for providing support services, such as promoting their products and arranging training events.
These life insurers (and no others) had also been selected to be included on the advisory firm’s advice panels for investment products. The process the advisory firm had used for panel selection gave it significant flexibility to select life insurers that were purchasing services and to discount those that offered suitable products but did not purchase services it offered.
Other examples included substantial payments for attending events and accepting hospitality from providers, and accepting significant payments to support IT systems upgrades, particularly where this was geared towards improving compatibility with the provider’s own systems.
Clare Griffiths, senior policy adviser of the Association of Professional Financial Advisers, says just over half the firms sampled by the FCA had agreements the regulator considered could breach the inducements rules.
It is therefore vital that advisers know what the FCA considers to be poor practice and what it finds acceptable support offered by providers.
Clive Adamson, director of supervision at 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 signaled 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 Retail Distribution Review.”
“Most of the firms involved in the review have already made changes, which are welcome, but we want all firms in this market to review and, if necessary revise their existing arrangements.
“We will revisit this area in the future to check that the necessary improvements have been made.”
