Fiona Murphy asks what the FCA's review into inducements from life offices means for the advice industry
The Financial Conduct Authority’s (FCA) review into whether adviser firms continue to be influenced by inducements from product providers proved to be damning reading.
A case of ‘commission’ by any another name, it found that advisers across the market were still receiving incentives from life offices, in turn influencing their relationships.
The paper, GC13/5 Supervising retail investment advice: inducements and conflicts of interests, sampled 26 life insurers and advisory firms about their service. It found many practices were in clear conflict with the spirit of the Retail Distribution Review (RDR.)
Such conflicts of interest appeared to be linked to securing product sales. These included hospitality, payment for access to management teams, long-term agreements, non-monetary payments such as gifts, promotional activities or competition prizes and the implementation of support services and IT systems.
Joint ventures, such as investment propositions being jointly designed by providers and advisory firms, were also under scrutiny. It cited a case of an advisory firm paid up-front fees by a provider with its profits increasing the more it placed business into the joint venture.
The FCA identified two firms that were potentially in breach of the rules and has referred them to enforcement for investigation. Partnership was confirmed as one of the two firms involved, the second has not yet been revealed.
Retirement Planner contacted Partnership for an update on how it was working with the regulator. A spokesperson for the firm simply said: “We have no further comment.”
However, many advisers have questioned why the issues hadn’t been highlighted before.
Chance for clarity
Association of British Insurers director of financial conduct regulation Maggie Craig, welcomed the publication of the paper. “The publication is a good start, but more clarity regarding FCA expectations in this area would be helpful, particularly around initiatives such as joint ventures,” she says.
For Association of Professional Financial Advisers director-general Chris Hannant, it’s all about having consistency across the advice market.“There should be a level playing field and the rules should be enforced. There should be clarity around the rules. The revised guidance the FCA has put out should go some way towards helping that. Our members are generally supportive of even-handed rules,” he says.
How can a firm identify what is a legitimate relationship between a provider and adviser, and what could foster bias?
Perceptive Planning chartered financial planner and compliance and operations director Phil Billingham, says: “The easy bit is if every event, transaction, occurrence and interaction is always seen through the prism of ‘is this in a client’s best interests?’ If that’s the acid test for every single interaction, then it’s really easy and echoes what the FCA has published around ethics. If we’re talking about the spirit of RDR, one of the intended outcomes is that consumers should be confident the adviser is working in their best interest.
“There’s a firewall between attending an event for professional reasons and something that is designed to influence behaviour. Let’s say a conference is sponsored by one of the professional bodies. In that conference, the provider would have no influence over who came and what sessions they went to. It’s up to advisers to filter out what is a product push and what is added value. That is legitimate marketing.
“For a provider to say: ‘would you like to sit in the box at Lord’s cricket ground and we will ply you with champagne’, then that’s quite problematic. That is behaviour is designed to sway behaviour. This requires more careful management and disclosure. Currently, 70% of investment decisions are now made involving paraplanners, but somehow they never get invited. Some of the trends identified in the FCA’s paper were really old school. Behaviours haven’t changed since the 1980s.“
How can firms ensure they comply with the rules? Almary Green managing director Carl Lamb, says: “Firms need to have stringent internal procedures that follow not just the spirit, but the law of RDR. If anyone has any dealings with any external source we keep a register. Those registers are reviewed at directors’ meetings on a quarterly basis.”
Small or large firms
The key question has been whether this is an industry-wide problem or restricted to a few players?
Hannant explains: “For most, it’s not relevant when you think about the size of firms. It’s only worthwhile when you think about a large insurer or a large product provider providing target arrangements at large firms. For the bulk of small firms it’s not even a question.”
What can firms do to make sure they are not breaching the essential principles of the RDR in that case?
“For large firms it comes down to a bit of common sense. The FCA is going to be sceptical about anything that looks excessive and it says it is fine for contributions to cover costs of things that are reasonable, whether it be training or anything that is relevant. You shouldn’t be making significant profit. It’s about taking a reasonable and balanced approach,” Hannant says.
Billingham agrees it is mostly a problem for large firms, particularly those that are aligned with networks.
He says: “If you look at the accounts of networks, their profits have come from charging providers to speak at road shows. It is a function of their business model that they are dependent on it. They are used to building it into their budgets and haven’t found a way to take it out.
“In small companies, you will probably have a social relationship with a representative of a company you have done business with for years. Meeting down the pub or at the golf club is the norm. Inevitably, it’s fairly low grade in reality, but as long as those firms have fairly robust investment processes, the potential for consumer harm is low.”
He continues: “The reality is that the differential between providers and funds is quite low, so if you used one fund over another on the grounds that one firm hadn’t bought you a drink, as long as the asset allocation is the same, the harm to consumers at small IFA level is small change.
“I’m not saying we should ignore the problem at small IFA level, but it’s the larger firms that regard themselves as distributor of product, the Byzantine practices where the differential pricing is higher to consumers to account for these freebies and gifts. That’s where the problem lies.”
However, it’s not all doom and gloom for the advice sector, as the regulator acknowledged firms were cleaning up their act.
FCA director of supervision Clive Adamson, says: “Most of the firms involved in the review have already made changes, but we want all firms in this market to review and, if necessary, revise their existing arrangements. We will revisit this area to check that the necessary improvements have been made.”
Despite this, it’s clear that providers and advisers still have a lot to do if they are to fully comply with the requirements of RDR.
Start with customer requirements
To ensure creditworthiness assessments compliant
Avoid broad-brush strokes
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