The Financial Conduct Authority (FCA) has outlined a number of good and bad practices in its consultation paper on inducements after it found "serious failings" among advisory firms in complying with the regulator's conflict of interest rule.
1) Payments to secure distribution
Some advisory firms appeared to have received payments from life insurers in exchange of selling their products or services, the FCA found.
It said there was a"positive correlation" between the level of payments made by life insurers to advisory firms and the products placed on their advice panels.
The regulator also found that providers had spent increasing amounts on support services of advisory firms in the lead up to the Retail Distribution Review (RDR) and beyond, which did not necessarily enhance the quality of service for the customers.
2) Payments that have the potential to inappropriately influence personal recommendations
Some advisory firms were in danger of recommending particular products for their own commercial benefits rather than in the interest of the clients, the FCA said.
This was because of agreements with providers that "potentially incentivised advisory firms to promote a particular provider's products or services among their advisers".
The regulator also said firms failed to put effective controls in place that would prevent potential conflicts of interest.
3) Joint ventures
The FCA identified joint venture models that "in some cases appeared designed to channel monies to advisory firms to secure distribution" and had the "potential to inappropriately influence the advice given to customers".
The regulator warned firms that they had to make sure joint ventures are consistent with the RDR and designed "with the end customer in mind". It said it would take immediate action where this was not the case.
4) Payments for IT development that complied with the FCA's rules
The FCA gives the example of an advisory firm which was able to demonstrate that payments made by the provider for developing its IT systems covered the costs of integrating the respective new business systems only and resulted in anticipated equivalent cost savings for the provider.
The firm also demonstrated that integrating the IT systems was designed to enhance the quality of service to customers by streamlining and automating processes and reducing the possibility of errors in the application processes.
5) Payments for training that complied with the FCA's rules
The FCA reviewed agreements where the provider contribution to a training event was designed to recover the costs incurred by the advisory firm of organising and arranging for the provider's active participation at the training event.
The training was designed to enhance the quality of service provided to customers, and the provider had made it generally available to other advisory firms.
Some firms set out for the regulator, in some detail, the nature and purpose of the training and the intended audience, together with the associated cost so the FCA could clearly see the training was for a genuine business purpose and that the cost appeared reasonable and proportionate to the provider's participation.
In many cases providers had benchmarked the training costs, e.g. on a per adviser basis, to determine the reasonableness of contributions requested from advisory firms.
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