One of the key findings of the Financial Conduct Authority’s recent Sector Views report is that the current economic climate has made it even more difficult for consumers to achieve decent returns from safer asset classes.
This has pushed many consumers towards high-risk retail investment products, exposing them to more risk than they can afford to take.
To compound matters, it is clear from both the Sector Views report and the FCA’s recent host of ‘Dear CEO’ letters that the regulator sees conflicts of interest, arising from the desire of companies to generate ongoing advice and investment management fees, as a driver of significant harm to consumers.
The regulator is concerned that some financial advisers recommend products or services because of the ongoing revenue they will generate, ignoring simpler and lower-cost solutions that could be more suitable, especially for many smaller investors.
How to tackle conflicts
Advisers should always be conscious of the conflicts of interest they face when recommending products or services, in order to minimise the risk of consumer harm. The FCA expects companies to achieve this by taking reasonable steps to identify conflicts and then to manage these risks effectively (or to at least disclose them to consumers if they cannot be managed).
Even if companies are confident they are doing all they can, that will not cut the mustard if they cannot evidence how they do this on an ongoing basis (for example, from the way they use their conflicts register and compliance monitoring management information).
In our view, conflicts of interest can only be addressed effectively if their identification and management is integrated into a company’s control framework.
Potential conflicts should be considered throughout the advice process, starting with product governance (for example, target market assessment and proposition development).
The company’s conflict register must be a ‘live’ document, reviewed regularly by senior management, not just by compliance. The register needs to contain adequate detail of the controls in place to mitigate and manage conflicts. Unfortunately, in our experience, advice businesses tend to be poor at doing this.
The importance of training
In our work with companies, we have found that an effective conflicts framework is always supported by providing training on conflicts of interest to all relevant frontline staff.
Conflicts training should be tailored to the company’s sector and business model, and should consider:
• The target market;
• The products and services offered, and;
• Any other conflicts of interest that may be relevant to the business.
Training will also assist in embedding a culture that shows the company takes conflicts seriously.
Businesses should question whether their approach to compliance assesses the conflicts arising from complex products and services, as well as ongoing support and fees.
While many may think their culture promotes a zero-tolerance approach to conflicts, this is not always consistent or supported by employees’ targets and their remuneration/promotion packages, which can often be designed in a way that inadvertently encourages conflicts.