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.
HR and senior managers should be engaged in any training so they can understand the perils of conflicts and can provide adequate oversight and challenge – for example, before they sign off on any performance assessment schemes for employees.
Beware biased advice from poor charging models
It is well known that conflicts of interest can be a major problem in the area of defined benefit pension transfer advice, where contingent charging models are common and recommending a transfer is likely to generate ongoing advice and investment management fees.
But conflicts of interest from charging structures, and the desire to maximise recurring income from assets under advice and assets under in-house management are not limited to DB transfer advice.
It is evident from its recent communications aimed at the advice sector that the FCA sees conflicts from companies’ charging structures as one of the main drivers of unsuitable advice.
Challenge yourself
Have you really identified all your conflicts and how you are managing them?
In our experience, many advice companies assume they have identified all the conflicts of interest they face and that their controls over suitability of advice will ensure they will not affect outcomes for clients.
Unfortunately, we find that this confidence is usually misplaced when we review their conflicts register, their compliance monitoring outputs and a sample of their client files.
Here are just a few examples of obvious conflicts of interest facing many advice businesses:
• Targets for advisers, and for the wider business, based on increasing assets under ongoing advice.
• Independent advice businesses that have an in-house investment solution within their group (for example, a discretionary manager).
• Advisers incentivised to generate assets under management for in-house investment solutions.
• Discounted or waived initial advice fees for clients who sign up for ongoing advice.
• Contingent charging models (and not only for DB pension transfers).
• Large ‘implementation fees’ payable if the client accepts the recommended transaction (that is, in comparison to the size of the ‘advice fee’).
• Default solutions that invariably involve ongoing advice and investment management.
• Advice businesses valued predominantly from ongoing advice fee revenue.
• Restricted advice models that prevent advisers opining on the suitability of clients’ existing investment holdings.
• A business model based on declining to provide ‘one-off’ advice to new clients, unless they agree to sign up for ongoing advice.
How many items on this list are relevant to your business? How many of them are recorded on your conflicts register? What MI are you receiving from your monitoring activity to evidence that you are managing these conflicts effectively?
There have been several recent examples of advisers where financial conflicts of interest has been found to lead to unsuitable advice for clients and cause them to suffer substantial harm.
For example, in April, The Insolvency Service announced it had banned adviser Gerard Blakemore from being a company director for eight years. The IS said the ban was for recommending clients to invest in a high-risk and unsuitable overseas company in which he had a personal interest.
In February, Mr Blakemore signed a disqualification undertaking in which he did not dispute he had breached his duties as a director of Blakemore Wealth Management.
Of course, most advisers would never do anything like that. But they may well be faced with conflicts of interest, albeit less blatant, when making their recommendations, which need to be recognised and managed effectively.
Conflicts of interest in the financial advice sector is a top priority for the FCA and is likely to continue to be so. We believe now is a good time for companies to challenge themselves about how they are dealing with conflicts of interest, so they are able to provide convincing evidence if asked to do so by the regulator.
Mohona Biswas is an associate and Neil Walking is a managing consultant at Bovill
