Network chiefs and lawyers are warning firms not to “let their guard down” on inducements after the FCA dropped its investigation into Partnership this week.
In September 2013, Partnership said the FCA had appointed investigators to analyse a distribution deal with an advice firm that could have undermined the RDR.
The statement came after the FCA revealed two firms could face enforcement action following a review which found arrangements between providers and advice firms that could breach RDR rules.
But in a statement to the stock market on Monday, Partnership chief executive Steve Groves revealed the FCA’s investigation into the firm had ended.
He said: “We are supportive of the principles of the RDR, confident that our distribution agreements are compliant with the FCA rules and remain committed to acting in the best interests of our customers.”
Despite this, experts warn advisers and providers must remain vigilant or risk falling foul of the regulator’s inducements rules.
The FCA’s thematic review examined 80 deals between providers and advisers and found just over half of the firms had agreements in place that could breach inducements rules. A string of firms reviewed their corporate hospitality and any money they received from providers for third party services in the wake of the paper.
EY estimated advice firms have up to £30m relying on these types of provider payments.
When the Partnership investigation was first reported in the media, the insurer’s share price took a nose dive. It has also plummeted as a result of Chancellor George Osborne’s Budget reforms, with annuity sales falling off a cliff as people defer purchase ahead of April next year. But the firm’s statement to the stockmarket confirming it had been cleared by the regulator saw its share price barely move.
A source says: “Partnership was furious because it believed the FSA approved this deal. When the FCA came along and looked at inducements, it was minded to put Partnership into enforcement.
“Partnership was very hacked off when it was told it may have breached inducements rules after being given the go-ahead.
“The insurer would be pretty glad if it had to unwind a distribution deal because it was done in the days when it would get shedloads of annuity business.”
Partnership is understood to have invested in an expensive legal team to fight the case.
Openwork has a single-tie annuity deal with Partnership that could be worth up to £15m. After the insurer confirmed it was under investigation by the FCA in September last year, Openwork said it was not involved in any enforcement action in relation to inducements.
Openwork proposition and marketing director Phillip Martin says the regulator’s stance on inducements is “very clear”.
Tenet Connect and Select managing director Mike O’Brien adds: “I don’t think the FCA would do what it did [in this case] again without proper investigation. Partnership was vociferously of the view that it operated within existing rules.
“But there is no suggestion the FCA has changed its rules or Partnership operated outside them. Now the investigation is complete, our reading is that Partnership had legal advice before entering into the agreement and that advice was sound. I don’t think it changes the rules, whether you think they are right or wrong.”
Lighthouse chief executive Malcolm Streatfield agrees the ruling does not have wider implications for existing provider/adviser distribution deals.
Reynolds Porter Chamberlain regulatory partner Robbie Constance says the FCA is looking for a well known “scalp” to send a message to the industry that it is taking the issue of inducements seriously.
“The industry needs to be wary of letting its guard down on the back of this news,” he says. “So far, the FCA has taken a light-touch approach on this issue. If the FCA doesn’t like inducements, it could just ban them like it has banned commissions. This may all be part of a longer process of weaning the industry off these provider arrangements. I assume the FCA is still looking for a high profile scalp to hammer its message home in its now familiar manner.”
Statement of intent
Foot Anstey partner Alan Hughes says the regulator is continuing to review distribution arrangements and firms are taking the inducements guidance “very seriously”.
He says: “The FCA didn’t feel as though it could make a point in this case but it doesn’t mean it won’t try again. I know a lot of distributors and providers are taking guidance on inducements very seriously. They are taking a long, hard look at arrangements and changing them. It’s still on the radar and there could be further FCA action. It’s no reason for complacency.
“When you have had a constructive dialogue with the FCA and you think something has been signed off, it will always reserve its right to have another look.”
But another major network chief suggests the publicity given to the Partnership investigation has provided sufficient warning to the industry. “I don’t think the FCA has a need for a scalp as it has made its intention very clear,” the source says. “Nothing will be done that breaches its intent at all. All it was doing was closing down agreements put in place very close to the inducement rules coming into force. It will probably walk away having lost this battle but making its intent clear.”
Sesame was yesterday hit with a £1.6m fine for setting up distribution deals which required providers to purchase additional services to secure a place on its restricted panel.
The firm signed long-term deals of five years or more and told providers it expected them to spend an extra £250,000 a year on services to be placed on its panel. In an interview with Money Marketing, Sesame executive chairman John Cowan admitted the company is still using providers selected on a “pay to play” basis on its panel.
Sources say the FCA is examining other multi-million pound distribution deals and corporate trips for senior executives funded by providers.
Most of the distribution deals are said to have already been unwound as the FCA investigation gripped the company.
Independent consultant Richard Hobbs says: “What is damaging for brands is when you are actually fined and you make a mess of handling the media. Being investigated and being cleared is better than never being investigated at all. In a perverse way it is a health check to kill the rumours.”
Partnership declined to comment further. The FCA confirmed the investigation had concluded.
Distribution deals between providers and advice firms
In 2012, Partnership became the sole provider of conventional and enhanced annuities for Openwork for five years, landing the advice firm up to £15m.
Partnership bought a 50 per cent stake in Sesame Bankhall Group’s retirement referral arm, Gateway Specialist Advice Services. At the time it was estimated the deal cost between £500,000 and £1m.
In 2012, Sesame and Henderson launched Optimum, a range of four multi-manager funds. The funds are designed to be mixed, with the weightings based on Sesame Bankhall Group’s risk profiling tool, designed by Oxford Risk.
Octopus and Openwork launched multi-manager fund range Omnis Investments in 2008. It is majority-owned by Openwork, with Octopus the minority shareholder. It includes four multi-manager funds run by Octopus, three multi-asset funds with Threadneedle and seven single strategy funds.
Aegon discussed paying £2m a year for “sales and marketing activity to support our partnership”. Aegon and Caerus have a single-tie pension arrangement in place.
Nick McBreen, IFA, Worldwide Financial Planning
The inducements rules assume IFAs are either corrupt or stupid and it is unacceptable. Do they think we are sufficiently stupid to make advice and investment decisions on the back of being taken out for lunch? We are grown-ups with due diligence in place.
Alan Lakey, Partner, Highclere Financial Services
We need recognition from the regulator that some things are reasonable and some are not. It is a hell of an insult to an IFA to say that if we are bought a lunch then we will hand over business. They are implying that I am so easily bought by something like a trip to the tennis.