The Financial Conduct Authority (FCA) has today laid out its final rules around adviser-provider inducements. Here IFAonline breaks down the paper into what the regulator deems acceptable - and what it definitely does not.
The regulator takes the view that advisers are as equally responsible for ensuring conflicts of interest were not breached as the providers.
Advisers will find themselves breaching the rules if they entered agreements which could potentially influence their personal recommendations and create conflicts that the FCA did not think could be managed fairly.
These would likely create a breach of the FCA's Princliple 8 - conflicts of interest or violate the COBS inducement rules.
The FCA warned that longer term multi-year agreements between providers and advisers were more likely to make advisers breach Principle 8 than short-term agreements.
This was because the agreements often "represent a significant revenue stream for the advisory firm", the FCA said. When the firm relies on the ongoing revenue to sustain its business, that is when the conflict occurs, it warned.
Another point of concern were clauses that allowed the provider to negotiate a reduced level of payments when sales of its products through the adviser were down.
The FCA suggested that such a deal would drive advisers to recommend more of the particular provider's products than they may otherwise have done in order to meet the agreed sales target.
Reiterating its point on providers not being allowed to make payments to advisers that exceed the reimbursement of costs, the FCA again warned of the dangers inherent in service contracts between firms.
The FCA also warned of unmanageable conflicts when staff in advice firms, who guide advisers on the features and benefits of products, are also responsible for negotiating deals and providing services for providers.
These staff might sway towards pushing the products of the providers which also purchase services, the FCA warned.
However, the regulator recognised that some payments and services given by providers to advisers were designed to enhance the quality of service given to the customer.
The conflicts that occur in such situations are classed by the regulator as 'of a nature that can be managed'.
Benefits that fell into this category were typically "reasonable and proportionate" and of a "limited scale and nature", the regulator said.
In short, the advisory firms receiving those types of benefits did not rely on them and would not feel a significant impact if they stopped.
The FCA also did not expect such arrangements to interfere with how the adviser's business was channeled.
And advisory firms were not found to be recovering more than their "reasonable costs" from providers.
The FCA also reiterated it expected firms to make clients aware of any payments between it and its providers under service or distribution agreements before the clients sign up to the service.
Warns on profits
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First mentioned in Cridland Report