The FCA has made it clear that shady deals creating favourable treatment between advisers and providers are not acceptable. But, Carmen Reichman asks, should it be asking for greater transparency?
The regulator has cracked down on inducements, making it very clear in its guidance paper that back-door deals reminiscent of the old commission model have no place in the advice industry post-Retail Distribution Review (RDR).
Reviving its old set of inducement rules, which span from conflict of interest to business conduct rules, the Financial Conduct Authority (FCA) outlined how advice firms could not accept services or payments that would influence the amount of business created between them and their provider.
In its paper, the FCA emphasised that the responsibility for controlling inducements was shared equally between both advisers and providers, adding that it would not think twice about prosecuting breaches of rules where they occurred.
How much transparency is enough?
In fact, prior to finalising its guidance the FCA had already started enforcement proceedings against two life insurers, with enhanced annuity specialist Partnership Assurance said to have been probed more deeply by the regulator and awaiting further action.
House in order
The regulator ordered firms to review their arrangements over the next three months to make sure they were within guidelines but stopped short of demanding clarity on the extent to which those deals were present and how much money was passing hands on such terms.
Now firms have asked for more transparency. Managing director of support services firm Threesixty, Phil Young, came clean about the amount of money his firm expected to receive from providers for staging training events last September.
He said the firm was expecting about £400,000 from 17 different providers but made no profit from the arrangements. In doing so he urged other players, including his rivals, to reveal their arrangements too, saying he did not see why payments should be secretive if there was nothing to hide.
He said: "We just wanted to be upfront about it saying that this is what it is, it's a relatively modest amount of money and we can show people where it gets spent. That's put people at ease. We know for a fact that some of the large networks and service providers are receiving payments from individual providers in excess of £1m per annum.
"If people saw that [...] advisers would start to question it a lot more and feel uncomfortable about it."
Referring to the FCA and providers' reluctance to demand more transparency, he added: "If there is no desire by the provider or distributor to unpick these agreements all that effectively will be happening right now is to try and find a way of justifying them and to [present] them in a different way."
Smart Financial managing director Steve Martin agreed with Young, saying "transparency is key in removing bias in the market". He said firms should "absolutely" reveal the extent of payments they have made or received by the counter-party.
Martin added: "I am very pleased that there has been a clampdown on these murky arrangements. Product providers have always tried to ingratiate themselves with advisory firms in a variety of ways and this paper makes it much harder for them to do so and puts more requirement on firms to make sure it's not happening."
Nice idea but...
However, Principal Financial Solutions director Chris Daems said that although being transparent was a better way of operating, it was unlikely that exposure of payments between firms would ever materialise.
He said: "I think the closer we get to greater transparency in terms of all costs, the better. However, I'm not convinced that in reality that can and does occur. In all industries, there are support service providers, sponsors and publications which rely on financial and other inducements to run and financial services is no exception."
Provider Standard Life said it was not prepared to disclose the amounts of capital it provided for training or adverts.
It said: "We have not used soft commission. In a small number of instances, we provide payments for attending training or for advertising which are allowed within the rules and guidelines of the FCA.
"We will be reviewing the guidance but we do not anticipate any material change will be required to our existing arrangements. [...] We do not disclose numbers."
Its rival Zurich UK also did not reveal the extent of its agreements. It said: "Zurich continues to work diligently to ensure that our partnerships with key distributors and third parties adhere to both the current and emerging regulatory position in relation to incentives."
Prudential followed suit by keeping its figures secret. However, it said it would ensure its arrangements are compliant with the FCA's rules on inducements.
A spokesperson said: "This paper hasn't come out of the blue and it shouldn't surprise anyone. Last year's draft guidance gave us the opportunity to begin preparing for the likely changes ahead. With the final guidance now clearly outlined, we'll be working to understand the full extent of the requirements, and to ensure that we continue to meet our regulatory obligations."
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From 1 April 2019
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