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Two firms face FCA enforcement action for breaking RDR code
by Jun Merrett on Sep 18, 2013 at 10:13
Two firms face enforcement by the Financial Conduct Authority following a review into inducements which discovered potential rule breaches.
The FCA has published a review to find out 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 no consistent with the objectives of 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. In many cases the FCA 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.
- Further, 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 up-front 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 wants 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.
Adamson said: ‘The changes we made to the retail investment advice sector were designed to mark a step change in the way advice was given. It signalled the end of advice that might be influenced by the commission payments made by product providers to advisory firms, and the start of a new era of trust and transparency between a firm and its customers. The findings of this review reveal that the actions of some firms have the effect of undermining the objectives of the RDR.
'Most the firms involved in the review have already made changes, which are welcome, but we want all firms in this market to review and, if necessary revise their existing arrangements. We will revisit this area in the future to check that the necessary improvements have been made.'
The FCA has also published proposed guidance to help firms understand how they should act, including how to deal with conflicts caused by providers paying for IT development and maintenance, staff training, conferences and seminars, hospitality, research and promotional activities.
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