Regulation  

FCA inducements guidance and the moral compass

    CPD
    Approx.30min

    On 16 January the FCA published finalised guidance entitled Supervising Retail Investment Advice: Inducements and Conflicts of Interest.

    Following the introduction of the RDR in 2013 IFAs have had to take care not to fall foul of the FCA’s desire to stop certain practices in the profession. Based on a superficial glance at the titles of the FCA’s publications, shifting from a “review” in 2013 to the “supervising” role in 2014, advisers would have cause to worry that the FCA is taking a more hands-on role and that it is becoming easier to breach the authority’s rules.

    The FCA’s latest guidance aims to diminish any buddying-up between providers and advisory firms. It aims to ensure retail clients receive advice about the best product for their needs and benefit from the relationship, rather than being recommended a product from a service provider because the advisory firm has a relationship, monetary-based or otherwise, with that provider.

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    In essence, the guidance looks beyond the payment of commission (which was addressed in the RDR) and assesses whether other payments by a provider, any behaviour of an advisory firm or any element of the relationship between an advisory firm and a provider may create inducements or conflicts of interest such that advice given to retail clients is inappropriately affected.

    As is mentioned below in this article, (relating to the effect the guidance will have on payments to advisory firms,) tThere is nothing to say that payments cannot be made or received, but merely that they must relate to something tangible and be reasonable in relation to the benefit from that tangible item.

    The FCA has focused on Principle 8 (Conflicts of Interest) from its 11 Principles for Businesses and the rules on inducements contained in section 2.3 of its Conduct of Business Sourcebook in its description of the guidance. This is where advisory firms should turn to for a thorough reading of the standards their behaviour should meet. By way of overview on the guidance, the FCA has listed examples of poor practice that might inappropriately influence personal recommendations.

    One such example is where advisory firms have negotiated agreements with providers such that the level of payments made by the provider to the advisory firm – and therefore to the ultimate benefit of the advisory firm – is dependent on sales of the provider’s product or whether the provider is on the advisory firm’s panel.

    Not only should advisory firms consider situations involving monetary issues, but they should also bear in mind that the FCA guidelines list overlap of staff functions as being poor practice. This staff functions create a conflict of interest that may affect advice given to a client. Advisory firms should consider whether, for example, the person responsible for providing information and guidance to advisers (to pass to clients) should also have the task of negotiating the provisions of products or services with providers. Such a scenario might mean, through no fault of that individual, that they are inappropriately influenced in respect of a particular provider.