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FCA inducements rules could unpick multi-million pound distribution deals

The FCA says providers and advisers could be forced to unpick major distribution deals over fears they are incentivising product sales.

The regulator has today published its final guidance on adviser inducements after it found providers were undermining the spirit of the RDR.

The FCA found providers offering “extravagant” hospitality, support services payments and exclusive distribution arrangements that were creating conflicts of interests.

Ernst & Young estimates advice firms have up to £30m relying on these types of provider payments. The FCA has given firms three months to make changes.

The guidance will mean existing distribution deals will have to change where they are in breach of the guidance, even if contracts have been signed beyond the three month deadline. The FCA says many distribution deals include clauses that can alter the contract to comply with regulatory changes.

An FCA spokesman says: “We expect firms to review their agreements to make sure they comply with our rules.”

It is understood major networks have millions of pounds tied up in existing deals that may have to be altered in the next three months to comply with guidance.

Threesixty managing director Phil Young says: “This guidance will have a colossal impact. It does not just apply to independent distribution but restricted too. Arguably it could be even tougher to prove it for restricted deals.

“Some networks are not financially viable in the long-term without this sort of revenue stream. There is not a lot of cost to cut and they cannot jack up prices to cover a big gap because of the amount of uproar it would cause. It begs the question: how are they going to survive?”

The paper also toughens up proposals on providers purchasing management information, data and research from advisers. Distributors must not make a profit and providers must derive “genuine business benefit”.

Association of British Insurers head of regulation James King says:  “We are surprised the FCA has used this guidance to introduce a significant new restriction on payments for services provided by distributors  – such as management information on customer behaviour. 

“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.”


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There are 6 comments at the moment, we would love to hear your opinion too.

  1. See my post on “FCA cracks down on ‘extravagant’ provider hospitality to advisers”

    I’ll bet that no firm with 10 advisers or less is affected. Again the point is proven.

  2. Keep swinging that double ended lightsaber Harry. Reckon you’re spot on.

  3. I think this is good forward progression in terms of how the industry interacts with each other.

    Looking back at the old days when a provider would take an adviser out for a round of golf and dinner in return for a piece of business was, in my opinion, a shameful practice as the consumer was never at the heart of the deal. I know things have moved on – but only in terms of how these inducements are offered.

    Hopefully we can soon get to a stage where the only consdieration every adviser makes about where they place the clients money is the clients circumstances and needs alone.

  4. To compensate, the networks whose long term financially viability will be adversely affected by the loss of these sorts of revenue streams may well have to hike the charges they levy on their members. It would be hardly credible to assume that providers who’ve bought into networks have done so with no interest in influencing distribution.

    One of the principal reasons for the deterioration in relationships between many of the large networks and their members is that the former failed to forewarn the latter of just how much more prescriptive regulation was going to become with the requirements of the FSA’s RDR coming into effect. Instead of just pumping out ever more compliance bulletins, which all too often just get put on a to-read-later pile, they should have held road shows throughout 2012 emphasising the need for members to consult checklists and templates to ensure they would be covering all the additional bases instead of carrying on much as before. Had they done that, instead of employing armies of file checkers who seem to find fault with everything after the event, a great deal of acrimony and resentment might well have been avoided.

    After many years of building and running sound businesses and serving their clients to the honest best of their abilities, nobody likes having their best efforts pulled to pieces and not infrequently declared “unsuitable”. It’s a hateful environment in which to have to work and it’s thus hardly surprising that members are voting with their feet to get out from under it all. They feel increasingly as if they’re being treated and managed like employees instead of customers and, as a result, they’re either going DA or defecting to younger, less expensive networks that aren’t financially dependent on provider support deals and who have thought through with far more care how they manage their relationships with their members.

  5. @Julian

    We have met and without being obsequious I know that you are a very competent adviser. It has always been a great mystery to me why those such as you ever chose to be in a Network in the first place. I have heard all the reasoning, but truth to tell it just doesn’t chime.

    So without getting at you personally we have a situation that for many was self-evident from the very start when our Ken first invented the concept. Joining a network put you under the mandate of the host; thereby you gave up a very significant element of your self- determination. Nanny has now lost much (if not all) of her funding from Daddy (the providers) and will now expect baby to pay for her services directly out of your own pocket money. I can well understand the complaining, but in truth you have no one but yourselves to blame. For small advisers it never was a particularly cost effective route anyway.

  6. Competence, in accordance with all the rules and regulations created by the FCA for its RDR and now being enforced by the FCA (by proxy as far as the networks are concerned) is now determined not by whether or not you’ve actually given good advice but whether or not, in documenting that advice, you’ve managed to tick all 50 compliance boxes “to evidence suitability”.

    If I screw up and a complaint goes against me, I’ll take it on the chin and, for obvious reasons, try not to repeat my error. But now we live in a world in which a network (allegedly) must declare advice unsuitable if just one or two boxes haven’t been ticked even if in all other respects it’s entirely satisfactory.

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