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Five RDR alarm bells: how to protect against inducement rules
by Danielle Levy on Oct 17, 2013 at 13:18
We look at five areas that wealth managers should pay careful attention to in order to make sure they don't fall foul of RDR rules.
Potential conflicts of interest between adviser firms and product providers have once again come into the regulator’s sights after it found poor practices that failed to comply with retail distribution review (RDR) rules.
The Financial Conduct Authority (FCA) recently published a thematic review of a sample of 26 advisory firms and life insurers that found over half had agreements in place that potentially breached its rules on conflicts of interest and inducements. The regulator also revealed that two firms now face enforcement action over their arrangements.
While the findings apply to different sectors within financial services, the examples of poor practice could prove relevant to the array of arrangements that exist between discretionary firms and advisers, alongside wealth management companies and the product providers they deal with.
‘Although the piece is targeted at the advisory community, there is a lot of read across to discretionary managers if they hold themselves out as whole of market and have panels on selected investments,’ Jonathan Wilson, a project director at consultancy Cordium explained.
Here we look at five areas that wealth managers should pay careful attention to in order to make sure they don’t fall foul of the rules.
Cordium consultant Jonathan Wilson says wealth management businesses must take heed of the FCA’s guidance on this subject and continue to evaluate whether external relationships could in any way put commercial interest ahead of the client’s best interests.
‘I think it is important that managers follow up on what the FCA is saying in terms of what is your business model and how it is structured and if in any way this goes against your fiduciary duty to look after your clients’ investments. There is nothing really new here, it is just part of the whole package to keep evaluating and challenging yourself to say you are providing the best fiduciary service,’ he added.
Have controls in place to avoid conflicts of interest
The FCA’s guidance consultation stresses the requirement for firms to mitigate any actual conflicts of interest, particularly those that emanate from historic relationships, but also identify payments with the potential to inappropriately influence personal recommendations. This means that having the right controls and processes in place is essential.
Mark Lester, a director at Walbrook Partners, says adherence to procedures is crucial.
‘I think the key to all of these things is to make sure that you set up proper procedures and then you have absolutely got to make sure that people follow them,’ he said. ‘You need to make sure everyone is trained in it, understands it and does it.’
Beware of joint ventures and inappropriate payments
The FCA highlighted joint ventures between providers and advisory firms as an area of concern and found in some cases they were designed to channel money to the advisory firm to secure distribution, with the potential to inappropriately influence the advice given to clients.
The regulator also expressed concerns over provider payments for training days and its worries seemed justified after it found one firm had secured substantial payments from a number of providers for support services, including promotion and training events. It then discovered that these providers and no others were selected for the adviser’s panels for investment products.
On this point, Rebecca Prestage, head of policy at The Consulting Consortium (TCC), says proportionality is key.
‘It goes back to the FCA looking at business models and making sure they are sustainable. If an advisory firm is reliant on income or payments for training and IT, or it could be from an array of providers on an ongoing basis,’ she said.
‘It is about looking at the bigger picture and the main thing is looking if any advice given to the consumer isn’t in any way influenced by the business with the provider.’
Blurring lines between DFMs and advisers
The Consulting Consortium’s Rebecca Prestage highlights that advisers and wealth managers who wish to stay independent post-RDR must make sure that any arrangements in place with external organisations do not jeopardise their status.
‘You need to look at any impact on independence,’ she said. ‘There is a whole array of things to look at for DFM and adviser firms. For example with inducements, it is all about which one of the two is making the personal recommendation, as you can find that line is quite blurry.’
With this in mind, she said companies must be clear about who is doing what in the relationship and that this is communicated to the client, who is also made aware of any inducements.
Where advisory firms operate a panel of providers, the FCA also stressed that companies should not be influenced by sizeable payments or benefits the provider offers through service or distribution agreements. The regulator said this principle applies to both independent and restricted panels.
TCC’s Rebecca Prestage says due diligence is key in terms of panel selection. ‘It is about the mechanism you have in place to review your panel, not just whether you are happy with your panel, but you need to review other providers out there.
‘If you are putting a lot of business one way, you need to be clear why that is,’ she added.