Any profit made by advisory firms for services rendered to product providers would create a conflict of interest in breach of the Conduct of Business Sourcebook, the Financial Conduct Authority has said.
When the FCA published its initial consultation in September of last year, the regulator made it clear that it was not against firms turning a profit in principle.
A subsection of the consultation document said: “Our rules do not prevent advisory firms from earning a reasonable profit (by charging a market rate) on service supplied to providers, but any profit increases the potential to create conflicts that need to be managed by firms.”
In the same paper the regulator said it was not only concerned with actual conflicts of interest but with potential conflicts as well.
In its finalised guidance on inducements, published this morning (16 January), the FCA has hardened its stance on firms making a profit from services to product providers.
In a feedback document published alongside the final guidance, the FCA reveals a number of respondents had argued that any profit being made by advisers could create a potential conflict of interest.
The watchdog says it agreed with the concerns and that while ensuring that payments for services only covered costs would not remove conflicts, it would “reduce the risk of any payments inappropriately influencing advisory firms in their selection of providers”.
It states: “We believe that payments made to advisory firms for services relating to designated investment business should be restricted to the reimbursement of costs incurred by the advsory firm in supplying the services.
“We think that payments that go beyond the reimbursement of costs are likely to create unmanageable conflicts of interest in the advisory firm, and could lead to the channelling of business to those providers that are willing and able to make significant payments.”
Advisers will still be able to charge a ‘market rate’ for certain services, such as financial promotions, where these are defined in the the table of reasonable non-monetary benefits in COBS 2.3.15G.
The FCA says in the feedback document: “The table of reasonable non-monetary benefits is not a definitive list of those non-monetary benefits and payments that can be automatically offered or received by a firm without breaching the inducements rules and it should not be read by firms as such.”
In its finalised guidance on inducements the FCA also states that exclusive distribution agreements between advisers and providers which lead to single provider distribution arrangements could also breach the new inducements rules, while panel arrangements must also be carefully monitored.
In particular it singles out restricted panels with few provider constituents and argues that advisers operating such arrangements would be more likely to suffer conflicts if they accept any payments from providers.
The paper states: “If a restricted panel of providers is created by an advisory firm/network (especially when that panel is restricted to a small number of providers, or if it is a sole provider arrangement), we consider it less likely for there to be the need for significant payments to be made in connection with the advisory firm/network promoting the providers’ products to its individual advisers.
“As the advisory firm has limited its advisers to recommending products from a small number of providers, advisers are more likely to be already aware of the providers’ products on the panel and we would expect awareness of these products to be part of the ongoing training of the advisers.”
Earlier this week, FCA chief executive Martin Wheatley told reporters he was concerned that payments from providers were creeping back into the market and effectively reintroducing the kind of bias produced by commission.
Mr Wheatley said: “We are aware of cases where there have been deals struck between insurers and distributors with payments being made for IT or consultancy services which feels very much like trying to reintroduce some sort of commission bias.”
