Scenario: You are chief executive of a wealth management firm and are completing the acquisition of a retail investment firm. The acquisition means certain growth for your combined businesses and brings many operational efficiencies.
The risk and compliance officer has been involved at every stage of the acquisition process and has now moved onto stage two of the plan, embedding common approaches and values.
This includes looking at provider contractual relationships and this is timely given the FCA’s recent finalised guidance – Supervising retail investment advice: inducements and conflicts of interest.
In essence, the finalised guidance seeks to ensure that the advice given by investment advisers is not distorted by inappropriate inducements or conflicts of interest. The guidance produced by the FCA is of no surprise, as it is part of its work in relation to ensuring the objectives of the RDR have been achieved and these changes are having a positive impact on consumers. The area of inducements and conflicts can be subject to waves of discussion and a plethora of missives, but this article considers some of the issues at the advisory firm level.
So what should be done and what should you consider?
First, it is important to assess whether the combined staff group really want to ‘do the right thing’ for consumers. This is the FCA’s baseline and cannot be re-stated enough times. The FCA is focused on this aspect and is keen to measure success of the regulatory framework through the behaviours displayed by those in the industry,
at all levels.
A way of engaging with all staff is to ensure they feel empowered to raise issues that they feel impact on the firm’s ability to treat its consumers fairly and they should not be in fear of any repercussions for doing so.
This spirit of ‘doing the right thing’ cannot be embedded overnight so you should consider a programme of training sessions and messages from the board to continually impress the need to be customer-centric.
Conflicts of interest
This is an age-old issue in regulatory terms and we should remember that conflicts of interest relate to organisation-wide conflicts as well as individual conflicts.
First, consider product selection. An assessment of whether the arrangements in place could give rise to non-financial inducements should be made. So, for example, is the rate agreed with the provider based on volume measures? Are the services offered by the panel provider in excess of what is routinely offered?
The contractual arrangements should also be considered. Is the contract structured over a number of years? If so, this could give rise to conflicts if, for example, the advisory firm relies on the revenue stream from the provider.
We all know that inappropriate inducements that influence an adviser or paraplanner are not usually in the customers’ best interests.
But how can you identify potential inducements from normal or routine business practice?
Although providers have an obligation not to offer inappropriate inducements, the responsibility rests firmly on the advisory firm and you need to ensure that no inducements or benefits are accepted that would affect the firm’s ability to treat its customers fairly.
The easy way of initially assessing these inducements is to consider: l Does the inducement give rise to future reliance upon the provider?
- Will the inducement continue for the longer term or is it short term?
- Would it lead to inappropriate channelling of business to the provider?
- Does the inducement reflect a reasonable reimbursement of costs?
- Are you able to provide documentary evidence of your considerations?
The issue of how to identify all inducements and conflicts and subsequently how to manage them, is old hat. What is new is the
need to effectively manage events prior to the impact of the inducement or conflict.
It is imperative that risk and compliance teams are involved in the early stages of discussions and negotiations with all third parties and that they are empowered to give comment or to introduce controls to manage the situation.
Simon Collins is managing director at RGP Compliance