FCA long-term savings and pensions director Nick Poyntz-Wright has criticised providers and advice firms for agreeing “murky” distribution deals in the run-up to the RDR.
The FCA this morning revealed two firms have been referred to enforcement following a thematic review of 80 service or distribution agreements from 26 insurers and advice firms.
The regulator says it had concerns about more than half the firms it reviewed.
Speaking to Money Marketing, Poyntz-Wright says: “Disappointingly, more than half of the 26 firms we asked for information were involved in agreements where we had concerns. That is not to say that every stone we turned over revealed a problem but it was a much larger proportion than we were comfortable with.
“The RDR was trying to ensure that recommendations to customers and outcomes for customers are not influenced by payments from providers to advisers.
“This is an area that we think really muddies the waters. One of our priorities is to make sure there is market integrity and to me this really speaks to that.
“There was quite a lot of anecdotal evidence that these sort of distribution agreements and service agreements were ramping up in the run-up to the RDR.
“To some extent it is the smell test – does it look and feel right? If it is a bit murky then I think that suggests there could be a conflict. Where there is a conflict firms must be able to show they are managing it effectively.”
The FCA has also set out concerns about contracts between providers and advice firms which generate a profit for the advice firm.
The regulator says while advice firms are be allowed to make a “reasonable profit” by charging a market rate for services supplied to providers, any provider contribution towards conferences and seminars should only cover the “relevant costs” incurred by the adviser firm.
Poyntz-Wright says: “We expect firms to identify, manage and mitigate any conflicts of this nature. The more profit there is in arrangements between providers and adviser firms, the more likely you are to get into that situation.
“Often the most effective way of mitigating conflicts is to make sure you don’t have it in the first place. If there is a significant level of profit then that is something to bear in mind.”
Asked whether the rules also apply to support services firms, which are not regulated by the FCA, Poyntz-Wright says: “If the advice firm is ultimately benefiting from the payments that the providers are making then the same rules apply.
“What we don’t want to see is firms responding to this by trying to route payments in a complicated web through third parties.
“Support services firms provide a valuable service but if the adviser ultimately benefits from provider payments then everything we are saying today needs to be taken into account because a conflict can still arise.
“Just because a payment has gone from A to B to C doesn’t stop that conflict.”