The Financial Conduct Authority states that advice firms and networks must ensure their advisers do not feel pressure – real or otherwise – to do business with providers that have any agreement in place with their company, such as a panel arrangement.
A spokesman says: “There are some situations where the only effective way to protect customers’ interests is for the relevant agreements to be terminated.”
A key area for bosses of large advisory businesses, networks or support services providers to consider is the message they could inadvertently be sending out with the inclusion of certain product providers on their panels.
The FCA’s Principles for Business section 8 requires that a firm must manage conflicts of interest fairly, both between itself and its customers and between one customer and another client.
FCA senior management arrangements, systems and controls section 10 sets out specific rules in relation to conflicts of interest and requires firms to take all reasonable steps to identify the types of conflicts of interest that arise in the course of carrying out regulated activities or ancillary services.
Once a firm has identified an actual or potential conflict, it must maintain and operate effective organisational arrangements to identify and take all reasonable steps to prevent conflicts of interest from “constituting or giving rise to a material risk of damage to the interests of its customers”.
The FCA gives some examples where firms could demonstrate that they had effective arrangements in place to ensure compliance with the relevant rules. These arrangements displayed a number of features, including:
1) The negotiation of service or distribution agreements between providers and advisory firms, and the decision making on these, was separate from the process of securing placement on advisory firms’ panels
2) Controls were in place in the advisory firms to ensure that benefits from providers did not affect personal recommendations
3) The boards of firms had been actively engaged in the process for entering into agreements and they, or a delegated committee, had approved the contractual arrangements
The FCA highlights where an advisory firm operates a panel of providers, the inclusion of providers on the panel should not be influenced by the provider’s willingness and ability to purchase significant services from or provide other benefits to the firm.
The FCA states this applies to the selection of providers for both independent and restricted panels plus exclusive ‘single-tie’ deals.
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, are also red flagged.
The FCA warns involvement of the marketing or training team in panel selection could create conflicts because staff in these functions might be unduly influenced to ‘push’ the products of those providers paying for services, and to discount those products from providers not purchasing services.