The FCA has today set out a hardline approach to inducements and conflicts of interest which severely restricts when advice firms can make a profit from provider payments.
In March, Money Marketing revealed the regulator was planning to clamp down on advice firms who make a profit from provider payments for services such as adviser training, conferences and seminars.
The FCA’s guidelines, published this morning, set out in detail how its inducements rules apply in a series of different circumstances.
In an interview with Money Marketing, FCA director of long-term savings and pensions Nick Poyntz-Wright said the rules also cover payments to support services firms.
Here, we look at how the regulator is looking to tackle a series of practices employed by advice firms to boost their balance sheets.
The FCA says payments for the provision of adviser training are acceptable but only to reimburse the “reasonable associated costs” incurred by the advice firm.
Example: The FCA cites an advice firm which sought a contribution from a life insurer towards the cost of organising a training workshop for its advisers. It says the contribution requested by the advice firm was “disproportionately high” and went beyond the reimbursement of the “reasonable costs” incurred by the firm.
Conferences and seminars
A provider can make a contribution to conferences and seminars only if the payment is reasonable and proportionate to its participation, and its staff are playing an “active role”. This means the provider should be presenting to advisers at the event rather than just “networking”.
Again, any payments should only cover the “relevant costs” incurred by the advice firm.
Example: The FCA says one insurer was guilty of making “excessive payments” to an advice firm to take part in its annual conference. It says the payments did not reflect the time and sessions at the conference when the insurer’s staff were likely to play an active role, which involved having a presentation stand at the conference and co-hosting a dinner for advisers.
The FCA says providers are allowed to provide hospitality of a “reasonable value” to advice firms. It says both providers and advice firms should have a “clearly defined policy” to determine what is “reasonable” in this area.
Example: The FCA says in some instances advice firms looked to secure “sponsorship” of events, some of which were held overseas and included advisers’ spouses or partners, which meant insurers were picking up a “significant proportion” of the overall costs of arranging the events, rather than making a “reasonable and proportionate” contribution.
Advice firms are allowed to make a profit from the placement of provider promotions but only at the “market rate”. It says this could be linked to what they might have to pay to a relevant trade publication, such as Money Marketing, for a financial promotion aimed at their target market.
Where any profit is made, even at the market rate, the FCA says advice firms will need to be able to show how this has been derived and why it does not cause a conflict of interest.
Example: The FCA says in some instances providers were determining the market rate based on “what everyone else had to pay to the advice firm”. It says this often led to “sizeable payments” resulting in the potential for firms to put their commercial interests above their customers’ interests.
Meetings with advice firms
The regulator says its review identified agreements under which advice firms charged providers for regular and structured meetings with their senior management team.
It says these payments have “clear potential” to cause the advice firm to put its commercial interests ahead of the best interests of its customers by recommending the products of providers who are willing to pay for these meetings.
An FCA spokesman says while these payments are allowed, the advice firm would need to be able to demonstrate that the conflict of interest has been properly managed.
Management information, data and services
Advice firms can make profit by selling MI, but the FCA says the existence of a profit margin risks increasing the potential for conflicts of interest. Furthermore, it says it will be difficult for firms to show they are not making a “significant profit” from these activities because it is difficult to establish a market rate for this information.
The regulator suggests one way for firms to be sure they are managing conflicts of interest effectively would be to restrict payments for this information to the cost incurred in producing it.