View the article online at http://citywire.co.uk/new-model-adviser/article/a703809
Two firms face FCA enforcement action over provider payments
by Jun Merrett on Sep 18, 2013 at 09:38
Two firms face enforcement by the Financial Conduct Authority following a review into inducements which discovered potential rule breaches.
The FCA has published the findings of its review into whether firms continue to be influenced by inducements from product providers despite the retail distribution review (RDR) coming into effect in January this year.
The FCA asked 26 life insurers and advisory firms to provide information about their service or distribution agreements. In total it received and reviewed 80 agreements.
The regulator said that just over half the firms it sampled had agreements in place which it considered to breach its inducement rules and the objectives of the RDR.
It also identified concerns over certain types of joint ventures between providers and advice firms which were not consistent with the objectives of the RDR.
The review found that there had been a significant increase in overall spending by life companies for support services offered by some advisory firms in the run up to and following the RDR.
The FCA’s findings included:
- Some payments by life insurers to advisory firms appeared to be linked to securing sales of their products; this included an increase in spending on support services (such as research or management information) provided by advice firms in the lead up to, and after the implementation of, the new advice rules. The FCA said that in many cases it did not think the business benefit of these increases was justified nor did it improve the quality of service to the customer.
- There were financial arrangements in place with life insurers that incentivised advisory firms to promote a specific provider’s product to their advisers, creating a risk that advice would be influenced more by commercial decisions than the interests of customers.
- The FCA also identified that certain joint ventures, where a new investment proposition is jointly designed by providers and advisory firms, could create conflicts of interest and potentially lead to biased advice. In one example, the advisory firm was paid substantial upfront fees by the provider with its profits increasing the more it channelled business into the joint venture.
The FCA said its review found that some life insurance firms had arrangements in place which could influence advisers which was against the RDR’s aim of removing commission bias. The regulator added that many of the firms involved in the review have now changed their arrangements as a result.
Clive Adamson, director of supervision by the FCA, said the regulator wanted all firms to review and if needed, revise their existing arrangements and it will revisit this in the future to make sure necessary improvements have been made.
‘The findings of this review reveal that the actions of some firms have the effect of undermining the objectives of the RDR,' he said.
News sponsored by:
Click here to watch a series of sponsored interviews with Jupiter's fund managers on the UK equity market.