Intermediaries are not entitled to demand provider "inducements" post depolarisation worth up to £1m in order to ensure their products are considered for panels or recommended lists, the FSA has warned in a "Dear CEO" letter.
Details of the letter were released late yesterday, following FSA chief executive John Tiner’s presence in front of the Treasury Select Committee earlier this week, when he and chairman Callum McCarthy were questioned on various matters of mis-selling.
Copies of the letter have been sent to most industry associations along with chief executives of all fund managers, banks, building societies and networks as well as all groups supervised by the FSA’s Major Retail Groups Division.
“Our work with intermediaries and providers in the retail market suggests that a few firms, in preparing for the implementation of the de-polarisation reforms, may be offering or seeking inducement payments to secure intermediary distribution,” the letter states.
”This would be incompatible with our consumer protection standards.”
Specifically, intermediaries are warned that any attempts to obtain such incentives would be in breach of Conduct of Business rules, outlined in Chapter 2 of that document.
”Outright cash gifs, not paid for particular transactions, would not be reflected in point of sale commission disclosure to the client and so inconsistent with our rules which require that commission disclosure to be as accurate and complete as possible.”
Strangely, although the FSA says it only has “anecdotal” evidence of inducements being paid, it still states it has been told that there are instances of such payments being worth up to £1m “as a condition for the provider’s products being placed on, or even considered for, the intermediary’s panel or recommended list”.
An FSA spokesperson says any action by the regulator against individual firms on the issue of inducements will depend on a number of factors.
For example, where firms "own up to it, we could then consider the merits of the case."
"That is very different from a firm that tries to hide it and gets found out."
Subsequent regulatory action, including disciplinary action, would depend on the size and type of inducement and how a firm decides to act subsequent to discovery.
There are no specific plans to follow up the letter, other than engage in general "supervision" as carried out anyway by the FSA on an ongoing basis.
AIFA has responded to the letter by stating it agrees with what John Tiner stated to the TSC regarding “clean, open and transparent” dealings that are “not to the detriment of clients”.
Any defence against FSA action on the matter would be on shaky ground, AIFA adds, because “IFAs should be aware of COB rules”.
However, AIFA also says it did warn such matters could happen as a result of the de-polarisation process.
In an additional point, the FSA has also made reference to a possible loophole in inducements opened up in CP04/3 relating to financing of IT goods and services.
The FSA now says "such assistance will be permissible only where it can be shown that it will result in equivalent costs savings for the product provider or for consumers."IFAonline
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