Exclusive distribution agreements between advisers and providers which lead to a single provider distribution arrangement or a sole firm representating a particular product area on an adviser firm’s panel, could breach the Financial Conduct Authority’s new rules on inducements.
In its finalised guidance on inducements published today (16 January), 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.”
The paper also states the FCA will monitor firm’s general approach to provider panels, saying this must not be in any way linked to the “provider’s willingness and ability to purchase significant services from, or provide other benefits to, the advisory firm”.
It says: “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.”
The finalised guidance closely matches that released for consultation last year, which identified five types of inducement at particular risk of creating conflict of interest.
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.
Although it closely matches the original proposals, the FCA has tightened up the wording of its finalised guidance to make it tougher in some areas.
Concerning IT systems upgrades that are not linked to the simple requirement to make systems compatible, the regulator has changed the wording 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.
Clive Adamson, director of supervision at the FCA, said: “The rules on inducements and conflicts of interest are not new. However our review made it clear there were certain practices that did not stand up to scrutiny.
“In the guidance published today we are helping firms better understand our expectations. Now it is for firms to make sure any payments are legitimate, are in consumers’ interest and that potential conflicts are well managed.”