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FCA guidance on inducements 5 key issues for ABI members

The FCA has published its final guidance on inducements for investment product providers and advisory firms.

The guidance makes it clear that financial advisers and product providers share the responsibility for managing potential conflicts of interests when receiving and making payments under service and distribution agreements.

Here are the five key issues of specific interest to ABI members:

  1. Rules and handbook guidance:  the FCA said they are providing further clarity to firms with the publication of non-Handbook guidance but they decided not to consult on changes to the Handbook rules/guidance. The FCA also emphasised that their COBS rules require firms to exercise good judgment and if firms are not clear whether receiving or making a payment will comply with COBS requirements, then this payment should not be made or accepted. They have also included examples of good and poor practice that they have seen in their thematic review and in other supervisory reviews.
  2. Clarity on both the provider and distributor responsibilities: the FCA acknowledges that it can be hard for a provider to assess the impact a payment may have on an advisory firm but stresses the rules bite on both parties to the transaction and the onus is on the giver to recognise that in making any payment there is a risk of a breach of rules. Providers should take measures to satisfy themselves that such a breach is unlikely (such as an audit of costs incurred by an advisory firm) before making any significant payments to that firm. The FCA also states that exclusive distribution agreements between advisers and providers which lead to single provider distribution arrangements could breach the inducements rules, and these arrangements must be carefully monitored
  3. Payments for services: the FCA has introduced a significant new restriction for payments for services provided by distributors (such as management information on customer behaviour) in stating that no profit should be made by advisory firms for services rendered to product providers. It says payments from product providers to advisory firms should be based on reasonable reimbursement for the costs incurred by advisory firms. The FCA state that payments that go beyond the reimbursement of costs are likely to create unmanageable conflicts of interest in the advisory firm, and could lead to the channelling of business to those providers that are willing and able to make significant payments. However, the FCA added that advisers will still be able to charge a ‘market rate’ for certain services, such as financial promotions, where these are defined in the table of reasonable non-monetary benefits in COBS. The ABI believes that this may raise practical and commercial challenges for adviser and provider firms, and could make it difficult to pay for services that ultimately benefit consumers. We are also concerned that a significant new requirement has been introduced via non-Handbook guidance.
  4. Table of non-monetary benefits: the FCA said that the table of reasonable non-monetary benefits is not a definitive list of those non-monetary benefits and payments that can be automatically offered or received by a firm without breaching the inducements rules and it should not be read by firms as such.
  5. Protection business and inducements: The FCA notes that while protection (and mortgage) business is outside of the scope of this new guidance, payments provided in relation to protection business are still subject to the Principles of Business, including Principle for Business 6 on conflicts. The FCA adds it expects firms to behave responsibly, and not attempt to circumvent the guidance by soliciting and making excessive payments for other product lines.

Next steps

The FCA said it expects firms to review, and, if necessary, revise their existing agreements in light of the finalised guidance within three months of its publication.

Read the guidance on the FCA website.

Background

The guidance follows a thematic review on inducements that found payments were still being made that could result in advisory firms favouring one product provider over another, which they felt was undermining the aims of the RDR and 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. Given the issues that were found across the market, they published a consultation to help firms further understand their expectations.

The ABI responded to the consultation on the guidance in October last year (pdf 44kB) asking for further clarification on areas of the guidance, emphasising the importance of being able to read the guidance easily alongside the relevant handbook rules and outlining the need to have clarity on both the provider and distributor responsibilities. 


Last updated 01/07/2016