Four things I learned from the FCA’s inducement paper

Donia O’Loughlin

Exclusive arrangement deals have now fallen under the regulator’s radar and, while the majority of advisers and providers surely do not need to worry, a select few may need to relook at the deals they have in place.

The Financial Conduct Authority has today (16 January) published its finalised guidance on inducements.

It reiterated what Martin Wheatley, FCA boss, told journalists earlier this week: that he was concerned that payments from providers were creeping back into the market and effectively reintroducing the kind of bias produced by commission.

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The finalised guidance reiterated the five broad forms of inducement at particular risk of creating conflict of interest that had been identified in a guidance consultation last year.

These included long-term agreements between advice firms and product providers; non-monetary benefits including gifts, promotional competition prizes and joint marketing initiatives; IT systems and upgrades; hospitality; and payments for access to the management team.

Here we summarise the four key updates made in the final guidance:

1. Restricted panels are in the spotlight...

More and more firms have announced in the last 12 months that they are changing their proposition from independent to restricted, claiming the IFA bar is too high and they may be opening themselves up to more claims in continuing down the restricted route.

Some have suggested that there is also a strong commercial incentive to go restricted for larger firms in particular due to profitable arrangements that can be struck for providers to appear on panels, with all manner of creative ‘services’ being bundled in to deals to justify costs.

But the FCA has seemingly taken the hint and the days of these lucrative deals may be over.

The regulator highlighted panel arrangements, especially for restricted firms that are likely to have fewer provider members, and made it plain it will scrutinise any service agreements between parties for potential breaches of its Principle 8 relating to conflicts of interest.

The paper says: “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 advisory firm.

“To do so is likely to result in a breach of Principle 8 because receiving payments or benefits may unduly influence the panel selection and lead to the advisory firm putting its commercial interests ahead of its customers’ interests. This applies to selecting providers for both independent and restricted panels.”

It also later states that it “considers it less likely” there will be a need for providers to contribute to promotion costs in a restricted arrangement, or for that matter to contribute to the costs of holding seminars or training. Such payments are therefore more likely to be considered a breach.

2. ... along with exclusive arrangement deals

Following on from the above in relation to panels, the paper warns that exclusive distribution agreements between advisers and providers which lead to a single provider distribution arrangement could breach Conduct of Business Sourcebook rules.