Janice Laing, business director at Compliance First, sets out the guidelines on how to avoid conflicts of interest in the regulator's eyes
In January, the Financial Conduct Authority (FCA) published finalised guidance regarding inducements and conflicts of interests relating to retail investment firms, following the guidance consultation published last September.
The paper reminds firms that one of the key objectives of the Retail Distribution Review was to remove the potential for remuneration paid to intermediary firms by product providers distorting the advice that consumers receive.
The regulator's expectations are that providers must compete on price and quality to secure distribution, and advisory firms should not be inappropriately influenced by commission payments, including non-monetary benefits.
The overriding principle is that any payments made by a provider to an intermediary must not impair the firm's ability to act in the best interests of the client, and providers and advisory firms must pay due regard to principle 8 of the principles for business: "...a firm must manage conflicts of interests fairly".
The rules surrounding inducements and conflicts of interest can be found in chapter two of the Conduct of Business Sourcebook (COBS) and essentially prohibit any fees, commissions and non-monetary benefits which:
• Impair the firm's duty to act in the best interests of the clients
• Are not designed to enhance the quality of service to the client
• Are not clearly disclosed to clients
Chapter two of COBS contains a list of non-monetary benefits that it is not necessary to disclose. These include gifts and hospitality of a 'reasonable value', freepost envelopes, seminars and conferences where there is a genuine business purpose, training and use of software systems where it enhances the consumer's experience.
The overriding principle emphasised by the regulator throughout the paper is that any payments made by providers to intermediaries must be to enhance the services delivered to consumers.
The FCA gives the following guidelines to evaluate benefits which would or would not give rise to a conflict of interest:
• The benefit is reasonable and proportionate
• The benefit is limited in scale and nature
• The firm is not reliant upon the benefit to continue to service clients
• The benefit does not result in business being placed with any one provider
I would fully endorse each advisory firm having a 'conflicts of interests' policy, which would include guidance on your rules about the acceptance of gifts and hospitality, state who is responsible for approving acceptance and outline amounts which your firm finds acceptable - while adhering to the requirements of the regulator.
You should also have documentation to use with clients which clearly and comprehensively sets out your policy. I would also recommend you keep records of any gifts and hospitality received and make sure the relevant systems and controls are in place to ensure that benefits received could not be perceived to unduly influence your choice of provider.
When the FCA uses subjective terminology such as "...reasonable and proportionate" or "...limited in scale and nature", I know there can be a concern for advisers that their understanding of these definitions can differ from those of the regulator.
In my experience, this can lead to a tightening of the rules by the compliance officer within a firm who is responsible for making the final call. As you would expect, I would personally counsel advisers to err on the side of caution when choosing which way to go on a regulatory guideline: when given the option, it is always better to be above reproach!
However, please bear in mind that small to medium advisory firms were not the major focus for this guidance and, as long as you can be confident that any benefits you receive fall within the criteria of your company policy, and that policy falls within the criteria of the FCA's guidance, common sense can be relied upon.
It is a shame for advisers that some networks and support services companies have felt it necessary to cancel events as a result of this guidance. Although, as I said, better safe than sorry, and it is possible that all services will be reinstated once the guidance has had time to bed in properly.
Overall, the context of the finalised guidance seems to focus the majority of its content at large distribution groups and there seems likely to be very little material effect on small firms.
That said, as always, it is important you remain aware of the FCA's stance going forward on the practical management of inducements and conflicts of interest.
The major point you need to bear in mind is that any form of corporate hospitality, or any other gifts or inducements that you receive from product providers, need to be appropriately documented in your gifts and inducement register.
Duo start roles on 1 October
Where true value lies
Economy to thrive despite global risks
Behaviours, animals or something else?