According to the Financial Conduct Authority, advisers should apply a ‘smell test’ to payments from providers: ‘If I were to take this from a provider could it influence or be seen to influence how I advise my clients?’
A number of examples the FCA found in recent research included hospitality, the provision of IT systems and the creation of joint-ventures that seemed disproportionate or unrelated to genuine training and support services.
An FCA spokesman told FTAdviser: “We felt that these created the potential for conflicts of interest, and in the worst cases, could be construed as inducements.”
The inducements rules at within ban the provision or receipt of any fees, commissions or non-monetary benefits relating to “designated investment business carried on for a client which impair the firm’s duty to act in the best interests of its client or are not designed to enhance the quality of service provided to a client”.
Therefore Clare Griffiths, senior policy adviser of the Association of Professional Financial Advisers, says any adviser seeking to enter into an agreement with a provider which which does not enhance the quality of service provided to a client is at risk of breaching the rules.
The FCA raised a red flag about significant increases in payments from providers to advisers.
The watchdog highlighted a case where a life insurer significantly increased its spending on support services offered by an advisory firm with little justification of the business benefit obtained and few steps taken to ensure a reasonable amount was being paid. The terms of the service agreement provided for a sizeable increase in services purchased in successive years.
Joint ventures that involved a proposed agreement between a provider and advisory firm to jointly establish a new investment proposition were also raised as a concern by the regulator. Under the proposed terms of one deal highlighted by the FCA the provider would have paid a substantial upfront payment to the advisory firm.
The advisory firm would have also received a greater proportion of the profits from the venture compared to its input into the arrangement - and its entitlement to profits would increase the more business that was channelled to the joint venture.
Given the inherent conflicts of interest involved, the FCA questioned whether the advisory firm, which is an IFA, could fulfil the requirements to be considered independent if it recommended funds it had a role in manufacturing.
In total, five general inducements were picked out:
1) Long-term agreements between advice firms and product providers, including certain panel arrangements
2) Non-monetary benefits such as gifts, promotional competition prizes, as well as joint marketing initiatives and promotion
3) IT system upgrades designed to make an adviser’s system compatible with the provider’s own
4) Hospitality, including taking multi-day overseas trips with spouses or family and training
5) Payments from providers to advisers for meetings with advisers’ management teams