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Financial services regulation and ethics


FCA reviews inducements and conflicts of interest

Charlotte Mannouris

The changes that were made at the beginning of 2013 were intended to mark the dawn of a new era − one of trust and transparency between advisers and their clients. However, of the 26 life assurers and advisory firms who were asked by the FCA to provide information about

their distribution arrangements, more than half were involved in activities that could breach the inducement rules, undermining the fundamental principles of RDR.

With some of the arrangements reviewed by the regulator, there was at least some effort to disguise the transaction as something unrelated to the sales of their products. Other product providers were less creative, and had set up financial arrangements that openly incentivised adviser firms.

Among the numerous poor practices that the review uncovered were clauses in agreements allowing the product provider to negotiate reduced levels of service if the provider lost its place on the adviser firm’s panel, or if there was a significant reduction in sales of their products. The FCA even found contracts between providers and adviser firms for services that generate a profit for the adviser firm linked (directly or indirectly) to product sales. The FCA stated in the report that any increase in spending by a life assurer was inappropriate if it was neither justified nor provided no additional benefit to the consumer.

The FCA was not just examining financial transactions. It also looked for any activity that created a risk that advice would be influenced by the commercial interests of product providers and adviser firms, rather than the interests of the consumer.

The FCA has published guidance to help firms to further understand how they should act, explaining why certain payments may cause conflicts of interest and potentially lead to biased advice.


Pensions Ombudsman criticises handling of SIPP regulation

Neil Dickey

The Pensions Ombudsman has rejected a complaint made against Standard Life over an alleged failure to undertake sufficient due diligence in relation to a SIPP investment.

The complaint had its origins in late 2009, when the complainant set up a Standard Life SIPP on the advice of his IFA. He also completed the application for an ARM Assured Income Plan Investment.

ARM was not regulated at the time, but it continued to accept receipts from investors in the UK up until 2010. In late August 2011, the Luxembourg financial services regulator told ARM that it would not be granted authorisation. ARM then stopped paying coupons and suspended bond redemptions. Of key relevance to the Ombudsman’s decision was that it was not until October 2012 that the then regulator, the Financial Services Authority (FSA), issued guidance for SIPP operators.

The FSA expected SIPP operators to have procedures and controls to enable them to gather and analyse management information aimed at identifying possible financial crime and consumer detriment.

The Ombudsman concluded that because the investment was made before the October 2012 guidance was issued, the only obligation placed on Standard Life by the FSA at the time was to assess whether a proposed investment met HMRC requirements not to invest in taxable property. The Ombudsman also noted that the FSA had taken a while to get “a good grasp of SIPPs and how best to regulate them”.

This inevitably raises the question of whether the Ombudsman would have taken a different view if the investment had been made after October 2012. The decision seems to imply that the complaint would have been upheld if the investment had taken place after the guidance had been issued.

Trying to second guess the regulator and the Ombudsman is, however, a dangerous game; hence increased  calls from SIPP operators  to the FCA for a clear list of approved investments.


Disclosure rules have “failed advisers and consumers”, admits FCA

Sam Dale

The FCA has admitted that it has failed the financial services industry and consumers with its disclosure rules, and warned that further problems could arise from new European proposals.

Speaking at a fringe event at the Conservative party conference in Manchester in October, Tracey McDermott, the FCA’s director of enforcement, conceded that product disclosure rules had added unnecessary costs for firms and created complexity for consumers.

“We are looking at how we can make regulation more effective. That means making more targeted interventions with the maximum impact for the minimum disruption. We need to work out how we distinguish between those interventions and those that add cost and complexity. One of those areas has been increased disclosure which has added cost to firms and created more complexity for consumers but has it really had the outcomes we want? No. What we are really trying to work out is where and how we should intervene,” she said.

This is the first time the FCA has publicly admitted its disclosure failings and their damaging effects. Ms McDermott said the FCA’s new approach to behavioural economics had changed its thinking. An FSA behavioural finance report, published earlier this year, suggested that providing too much information could lead to poor decision-making.

Separately, the FCA has also criticised the scope of EU disclosure rules and packaged retail investment product regulations, which will require a fresh Key Information Document. Advisers and asset managers have been raising concerns about duplicating information and disclosure requirements expanding into areas such as bonds, shares and savings accounts


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