The Financial Conduct Authority (FCA) has set out finalised guidance on how advice firms should deal with conflicts of interest caused by receiving provider payments.
The guidance also added a ‘reasonable value test’ to hospitality payments, to ensure that advisers avoid ‘extravagant’ promotional prizes and gifts.
The FCA has said that financial advisers and product providers share the responsibility of managing potential conflicts of interests when receiving and making payments under service and distribution agreements.
The final guidance on inducements states that payments from product providers to advisory firms should be based on reasonable reimbursement for the costs incurred by advisory firms
The regulator’s inducement rules ban the ‘provision or receipt of any fees, commissions or non-monetary benefits that relate to designated investment business carried for a client’, which:
- impair the firm’s duty to act in the best interests of its client
- are not designed to enhance the quality of service provided to a client
- are not clearly disclosed to clients – with some exceptions for non-MiFID business
In September 2013, the FCA published findings of a review into provider payments which examined whether firms continued to be influenced by inducements from product providers despite the retail distribution review (RDR) coming into effect in January 2013.
It reviewed 26 life insurers and advisory firms and 80 agreements and found that just over half the firms it sampled had agreements in place which it considered to breach rules and the objectives of RDR.
Clive Adamson, director of supervision at the FCA, said: 'The rules on inducements and conflicts of interest are not new. However our review made it clear there were certain practices that did not stand up to scrutiny.
'In the guidance published today we are helping firms better understand our expectations. Now it is for firms to make sure any payments are legitimate, are in consumers’ interest and that potential conflicts are well managed.'
In September 2013, the FCA also said two firms faced enforcement over breaches of inducement rules, one of which was later revealed to be enhanced annuity provider Partnership.
The FCA said that although the focus of its thematic work was on life insurers and advisory firms including networks, the rules covered circumstances when payments were made by providers to unregulated third party firms that were for the ultimate benefit of an advice firm.
On IT development and maintenance, the FCA set out examples where advice firms were breaching the rules by receiving payments, or other assistance from providers for developing software or other computer facilities that went beyond their needs.
It also said that firms could continue to receive hospitality, gifts and promotional competition prizes of ‘a reasonable value’ but any such payments should enhance the quality of the service provided to the client.
Where providers paid the market rate to firms for promotion, firms needed to demonstrate how this had been derived and why the revenue generated had not caused a conflict of interest, the FCA said.
It said: 'Advisory firms and providers should also consider whether ongoing promotional activity carried out in a given period could inhibit their ability to act in the best interests of clients.'
Candid Financial Advice's Justin Modray added: 'Corporate hospitality, ranging from lunches to exotic entertainment and trips, is rife and while advisers must keep a log of this it is not publicly disclosed. I would prefer advisers follow our lead and introduce a blanket ban on hospitality as this is the only sure fire way of ensuring it does not create bias.
'But at the very least such advisers should publish full records on their websites so that their clients can form their own opinions. We have never taken any hospitality or non client fee payments from product providers or any other supplier, an intention confirmed by an impartiality statement published on our website.'