Four things I learned from the FCA’s inducement paper

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.

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.

In its finalised guidance, the regulator says: “Exclusive distribution arrangements that advisory firms have with a single provider can lead to conflicts. This is the case where the selection of the provider is influenced by sizeable payments or benefits the provider offers through service or distribution agreements and results in advisory firms putting their commercial interests ahead of their customers’ interests.”

As we are all aware the FCA clamped down on adviser commission bias with the Retail Distribution Review; it is now warning providers and advisers they will fall foul of the regulation if they commit to ‘nudge, nudge, wink, wink’ deals to ensure advisers will turn to their products.

At the time of the guidance being published last year, the FCA revealed that two firms have already been referred to its enforcement division for potential rule breaches. Partnership admitted it was one of the firms referred a few days later.

Somewhat surprisingly, the word ‘enforcement’ is not mentioned in the FCA’s latest paper but there should be no doubt in firms’ minds that anyone treading this fine line will be held accountable.

3. Austerity will be the new buzz word in hospitality

The guidance says that while providers may give gifts to advisers including hospitality - and advisers can accept them - it is seeking to put an end to the days of “extravagant” perks and says gifts must fall under ‘reasonable value’.

When reading through what satisfies ‘reasonable value’ it sounds a little like the bribery act that journalists adhere to.

The FCA considers hospitality ‘reasonable’ if it is held in the UK and the ‘per head’ cost does not exceed previously agreed monetary value agreed by an “appropriate committee”. Providers can still pay for advisers’ food and drink but can only pay for accommodation if it is necessary.

The event should also designed be for business purposes, such as product training, to enable advisers to provide a better service to their clients. I’m guessing a day out at the races will now fall foul of this?

Providers also have to maintain a log of all hospitality and gifts provided to advisers over a specified period to ensure cumulative payments to advisers do not exceed the previous agreed limits.

4. No more Mr Nice Regulator

There are several points in the guidance where the wording appears toughened, but no more so than in relation to IT costs, which the regulator had previously be a potential breach if providers paid for upgrades that were not designed simply to ensure system compatibility.

The regulator has changed the wording in this section to state that this does create a conflict of interest - it had previously said it ‘could’ do so - and would not be in line with the Conduct of Business Sourcebook inducement rules - previously it had said such deals ‘may’ breach rules.

You have been warned.