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Chris Davies: The ‘bags of cash days’ have long gone

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The results from today’s FCA review on inducements paint a concerning picture. Poor management culture with a reliance on marketing allowances risks undermining the RDR.

Principle 8, which covers conflicts of interest and inducements, should be a core consideration when providers and advisers structure any service or distribution agreement. Yet the FCA found over 50 per cent of such agreements it sampled breached this principle.

The regulator is concerned the ‘old-school’ short-termist activities structured for instant gains could cancel out the long-term benefits of the RDR.

When I worked in Asia over a decade ago there were certainly inducements galore and plenty of conflicts of interest. The worst-case I remember is literally being offered a bag full of cash for the pension products I sold for one particular provider.

Such a ‘bung-culture’ still exists in some parts of the world, but we are now seeing an interventionist global movement towards consumer protection and professional services. This means putting an end to instant gratification.

Distribution payments linked to securing product sales, joint ventures where service propositions are designed jointly by providers and advisory firms and panel partnerships where distribution is secured through payment means that advice is influenced by commercial decisions not client interests.

The FCA’s behaviouralist strategy for consumer protection now means that such dysfunctional management culture will bring enforcement action, such as fines or bans.

Those firms (and there are many out there) who have focused their business plans on proper corporate governance, team support systems, paraplanners and data management systems will thrive.

In the good old days, professional service firms valued the legacy they left to the next generation of managing partners. I wonder if those days can now return before the heavy hand of the regulator dishes out the fines?

Chris Davies is managing director at Engage Insight

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  1. Campbell Macpherson 18th September 2013 at 5:04 pm

    Agree wholeheartedly, Chris. In the past, payments from providers to networks were the main way most networks were able to make a profit. This is obviously still the case for a small number of firms. For these networks, provider payments simply paper over the fact that their business model is simply not viable. By cracking down on this practice, the FCA will inevitably send such networks to the wall – or back to the “bank of Mum and Dad” (if they are owned by a big life company). Either way, this will be a good thing for the industry. I am a big fan of absolute transparency.

    The ironic thing about the whole situation is that these payments are rarely good business for the provider anyway. Providers soon realise that very few networks or service providers have genuine influence over their adviser customers when it comes to product sales, and even restricted networks can’t force their people to recommend products that their advisers regard as inferior. It will be good for all concerned to see the back of this nonsensical economics.

    http://www.campbellmacpherson.co.uk

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