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Cash in hand: FCA targets ‘big money’ inducements deals

Payments made by asset managers and providers to advice firms are coming under renewed scrutiny as it is revealed there are concerns Tenet is dangerously reliant on marketing deals.

Last month the FCA completed a new piece of work on inducements, asking networks and nationals to provide details of all payments received by product providers, Money Marketing can reveal.

The results of the review will not be made public.

Despite the RDR coming into effect almost three years ago and the regulator publishing final guidance in January 2014, networks are still receiving millions in marketing packages. One of Tenet’s major shareholders is understood to have raised concerns that the network is being propped up by marketing services agreements worth around £2m a year. In 2014, the group made a net profit of £350,000.

Pension providers are also warning that adviser support firms have been excluded from inducements rules. In addition, they say the regulator’s clampdown on hospitality “is getting out of hand”.

So are networks still flouting the spirit of inducements rules years after the RDR was introduced to remove bias from the advice industry? And can the FCA stop firms and providers from funnelling money in other ways?

Clampdown

Last week FCA director of policy David Geale said firms may still be receiving benefits that have the potential to influence the advice they give. Speaking at the regulator’s conference on Mifid II, which will ban all third-party payments, Geale said the culture at some firms has “remained unchanged” since the RDR.

Are networks still flouting the spirit of inducements rules years after the RDR was introduced to remove bias from the advice industry?

Money Marketing can reveal a sample of 23 firms have been asked to provide full details of all payments they receive from third parties, including pension providers and asset managers.

An FCA spokeswoman says it will not be publishing a thematic report but will feed the information into a consultation paper on the implementation of Mifid II before the end of the year.

A year ago Sesame was fined £1.6m for setting up “pay to play” distribution deals. Law firm RPC partner Robbie Constance says: “Sesame got caught and presumably the regulator was satisfied that sent a message to the market. The FCA published the guidance in January 2014 – we thought at the time it went quite easy on the market.

“There was an interpretation of the rules that they didn’t take, perhaps deliberately because of the impact that could have had. Mifid II is taking us towards a far stricter interpretation, which probably anticipates what the original rules were meant to mean anyway.”

The FCA’s evidence gathering comes as one of Tenet’s major shareholders has raised concerns about the sustainability of roughly £2m of annual marketing payments that the network takes from providers.

The network is backed by Aegon, Aviva and Standard Life, and Money Marketing understands that questions have been raised by at least one of the firms.

A senior source says: “Even the providers don’t view that sort of money as sustainable for long.

“Even if it’s sustainable from a regulatory point of view, I don’t see how it’s sustainable from a commercial point of view. So they are eventually going to have to find £2m of cost-cutting in some way or another.”

TenetConnect and TenetSelect managing director Mike O’Brien says the network’s shareholders approved the firm’s plans for 2015/16 at a board meeting last month.

“It’s a robust challenge process that happens every single year, and there’s argument on a line by line basis. So that conversation [on marketing deals] has been had, but it has been part of a wider debate, rather than a specific point.

“Like any business, we look at our costs every year, but obviously we also have to invest and we are spending money on technology to make sure we are efficient, and the largest part of our budget is people.”

Other networks have expressed surprise at the size of the sum accepted by Tenet from providers.

While they declined to share details of funds raised from providers, one rival says: “£2m sounds enormously high, and as either a provider or a distributor, you have to be able to explain that to  the FCA.

“It could be that some people are still sailing close to the wind but our events budget looks entirely different.”

Lighthouse Group chief executive Malcolm Streatfield agrees: “I find it inconceivable any business would be getting £2m from providers.

“They must be living in a different world to the one we are operating in.”

Streatfield adds many providers remain chastened following Sesame’s fine.

“That was a big enough warning across the marketplace that this kind of behaviour was not going  to be tolerated. So if people are starting to challenge that, then they need their heads tested.”

“Business works through relationships and to suddenly say you can’t take somebody to an event – does that feel like a regulator that is trying to help competitiveness?”

Threesixty managing director Phil Young says  his firm will take in around £350,000 this year for events, with a total of around 4,000 delegates attending.

Tenet maintains all money taken as part of marketing deals goes towards running events, which are accredited by the Chartered Insurance Institute’s professional-development centre and from which it makes no profit.

O’Brien says: “We are now without question the largest network for independent advice and that requires a different level of effort.

We have 1,300 advisers in total and we run events around the country. What’s more, we won’t just run them once. All that coffee and -bacon adds up – it doesn’t take that long to get through a pretty big sum of money.

“We provide copies of all our agreements to the FCA and they haven’t raised anything over what we are doing. And the compliance departments of the providers are all over it like a rash to make sure that we can justify what we are charging, to the extent that we have been asked how many cups of coffee we serve at an event.”

Service firm loophole

Nonetheless, O’Brien admits he is not surprised to find inducement back on the FCA’s agenda and he hopes the regulator will roll out its focus to other parts of the market.

He says: “Some of the service providers wouldn’t be subject to the same rules and there is potential for distortion there. I’m not saying the FCA will find anything, but it’s understandable they want to look at other areas, particularly in the aftermath of the pension freedoms.”

One compliance director at a large life company says that under the current regime, because service companies are not directly regulated, they can provide an avenue to navigate around inducement rules.

He says: “Threesixty, which is owned by Standard Life, can divert marketing payments through that company rather than the life company. SimplyBiz can divert marketing spend so it doesn’t touch the intermediary company, in effect circumventing the rules.

“It’s tempting for providers to set them up to be outside the rules and go back to the bad old days. The regulator has side stepped this a bit.”

Young says his firm would be comfortable with the regulator bringing service providers into the regime.

“We have taken the view that the rules should apply to us from the perspective that it could artificially affect the cost of advice.”

But SimplyBiz joint managing-director Neil Stevens says his firm is already implicitly part of the rules.

“We have our auditors check our business to make sure any provider we work with does not subsidise the work we do for advisers.

“Just because we are not regulated does not mean we can take money from a provider and use  that to contravene the [Conduct of Business] rules. If that was the case then we would be in breach of the conflict of interest rules, and people who say that we aren’t in scope don’t understand that.”

Hospitality

The anonymous compliance director says marketing agreements are still being paid, though at drastically lower figures than in previous years. He says the regulator is more concerned with tightening the rules on how providers use hospitality.

“All the major life companies run some kind of sponsorship: Standard Life has the golf, Aegon has the tennis, Royal London has the cricket. On the back of that sponsorship we all run hospitality and the regulator is signposting that they can’t see where providers sit with inducements rules if we are to have advisers  at sporting events.

“They are not being as clear as saying you can’t bring advisers; they’re saying justification has to be robust in order to invite them along but no-one is giving clarity on what that justification looks like.”

“It could get to the point of being ridiculous when we are debating whether someone can buy you a cup of coffee or not”

Streatfield says concerns over hospitality are getting in the way of firms’ day-to-day business.

“Hospitality is a moot point because we rarely get invited to anything these days. But it could  get to the point of being ridiculous when we are debating whether someone can buy you a cup of coffee or not.

“At the basic level, when we want to have a conversation about strategic stuff and someone is worried about whether they can buy you a lunch, there are more important things to be worried about. There is a case for the pendulum to swing back into the middle ground here.”

The compliance director adds: “Business works through relationships and to suddenly say you can’t take somebody to an event – does that feel like a regulator that is trying to help competitiveness? It doesn’t to me. It feels like the regulator is trying to police the industry, rather than working with it.”

An FCA spokeswoman says: “Our rules on inducements and conflicts of interest are not new.

“The guidance published last year was aimed at helping firms better understand our expectations. It is for firms to make sure any payments, hospitality or gifts are legitimate, are in consumers’ interest and that potential conflicts are well managed.”

The secret compliance director

There was big money behind marketing service agreements. We don’t see these so much any more but they are still in the market. The regulator originally set out to ban them and control them better and we’ve seen that happen. However, service companies are still out there doing them – they sit outside the rules. So Threesixty, which is owned by Standard Life, can divert marketing payments through that company rather than the life company. SimplyBiz can divert marketing spend so it does not touch the intermediary company, in effect circumventing the rules. A responsible provider will treat service companies as if they are intermediaries, regardless of them sitting outside the rules. If you’re saying service companies are outside the rules, it’s tempting for providers to set them up to be outside the rules, and we go back to the bad old days. The regulator has sidestepped this.

Recently the FCA has focused more on hospitality. All the major life companies run some kind of sponsorship: Standard Life has the golf, Aegon has the tennis, Royal London has the cricket. On the back of that sponsorship we all run hospitality and the regulator is signposting that they can’t see where providers sit with inducement rules if we are to have intermediaries at sporting events.

They are not being as clear as saying you can’t bring intermediaries – they’re saying justification has to be robust in order to invite them along but no one is giving clarity on what that justification looks like. To be completely risk-free you wouldn’t invite them, but we have agreements in place over the next few years and we will have to do some kind of events alongside them. Deals are also done on the basis that you are expected to take a certain amount of hospitality with it.

I don’t know why they are going after it. This is how a lot of cementing relationships at the top of adviser firms and networks is done.

Some of this policing is getting out of hand. The reality is business relationships are based on more than just proving client benefit. To say you can’t take somebody to an event –  does that feel like a regulator that is trying to help competitiveness? It doesn’t to me. It feels like the regulator is trying to police the industry, rather than working with it.

A compliance employee who wishes to remain anonymous

Adviser views

Robert Reid, director, Syndaxi Chartered Financial Planners

Typically the bigger networks were dependent on marketing agreements, [while] the smaller ones did not get enough money. How are networks still getting this money and who is paying it? The regulator told us they were stopping these agreements, so are they stopping it for some but not for everybody? There can be no middle ground on this.

Alistair Cunningham, director, Wingate Financial Planning

A truly independent, client-centric financial planning firm should be able to stand on its own two feet without any support from third parties that it does not fairly pay for. Inducements, third-party payments, and other “value add” services should be totally unnecessary, and if not already banned in legislation, they should be.

Arguably there is a space for provider-sponsored and “vertically integrated” product oriented advice, but this should have a clear label, health warning and only be dealing with more simple advice. The current regime is being used to befuddle consumers, which was surely not the intention of the RDR, and may well not be addressed by the advice review.

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Comments

There are 9 comments at the moment, we would lover to hear your opinion too.

  1. Networks, networks, networks.

    As I have repeated for at least 20 years these entities have never and will never be harbingers of the best in Financial Services. They have always been a dead weight on standards and ethics. They largely attracted those who were the least able and often caused the most problems. Before anyone screams – yes, there were and are notable exceptions, but regrettably, the exceptions prove the rule. They and their members were the most vociferous anti RDR critics.

    They consistently provided what was and still is regarded as a safe haven from bureaucracy and regulation – only to enforce their own gold plated versions in the hope that would protect those who run them. The new rules on management responsibility should be a bit of a wakeup call.
    The model itself largely relied on bidding up commissions, subsidies and back handers – what a way to run a business that is supposed to be focused on bring the best benefits to clients.

  2. Does the FCA honestly believe that an adviser is going to risk his or her business by recommending any given provider for a piece of client business because the adviser was invited to a tennis match, cricket match or other event? It is a ludicrous situation to be in and it must be the only industry in the world to have such scrutiny over who is invited to what. The FCA really should have much better things to waste their time on than something as stupid as this. Business has and will always be about relationships and if your research shows the top 3 companies have little or nothing between them, then of course you would like to give the biz to whoever entertained you. There is nothing wrong with that, its how the world works. Different if the provider you recommend is 10th in line and this is where the adviser would say to the rep, sorry but on this occasion you’re not in the ball park so I can’t recommend you.

    We all do this with our good clients in a hope that they will keep us in mind for continuing to use our services and us doing future business. This whole issue, once again, shows just how little those in charge of making the rules actually know about the real world of business. Does their incompetence know no limits? I would have to wonder

  3. Hmm. SimplyBiz are being a bit economical with the actuality methinks. True, provider payments don’t ‘subsidise’ their advisor firms because SB charges them a commercial rate. The money it gets from providers is therefore the cream on the cake. In return though providers get to pitch to SB members at its regional meetings much as in the old DBS days…

  4. Charles Seymour-Cole 29th October 2015 at 11:10 am

    In the past a lot of training and exam revision courses used to be provided by the product providers but this is becoming a thing of the past because of fears of being accused of offering “inducements”. This means IFA’s are having to find and pay for independent trainers which increases costs for an IFA practice still further.

    It is not just the direct regulatory costs that are increasing, and so forcing client fees up, it is the indirect costs as well.

    I have never let a providers training provision of Lunch after a presentation ever influence the outcome of a client recommendation unless, by coincidence, it happened to suit the clients circumstances; as Marty Y alluded to above.

  5. And so the bell tolls !!

    The networks will slip slowly into the night, once the life support is switched off !

    IMHO networks have always been a bit one dimensional, and based on bungs !

  6. IMO, client fees must cover all costs and a profit margin.

    If the customer’s will not pay, then they do not get advice.

    Simple.

    Now wait for the howls of “unfair”.

  7. Narrow-minded comments from Harry Katz and D H here. I could easily state that “all small, directly authorised IFAs are the biggest risk to standards and ethics in the industry, but before anyone screams, there are notable exceptions.” The argument works equally well either way. Some networks have an intrinsic problem in their culture, but so do plenty of DA firms.

    I worked for a few years for a small DA firm run by an old boy who has now retired. He’d been in the industry for 40 years and he genuinely believed he knew everything there was to know. It was only when I joined a network that I realised how dated our procedures were and how poor our files were. We were extremely ethical and gave good advice, but if somebody raised a complaint now, I doubt the files would back up our advice sufficiently and, as the firm closed, the FSCS would pick up the tab. We were far too small to show up on the FSA’s radar and I’m sure there are hundreds of firms out there in exactly the same position. Equally, some large DA firms have a ‘bums on seats’ culture to recruitment and some very shady sales practices.

    As network members, our advice is checked regularly. Any complex advice is reviewed and signed off before it goes ahead. They check that we are carrying out all of the services that we have specified in our annual fee agreements. They issue the FCA regulatory updates and test us on them. They arrange regular the technical training that used to be provided by the life companies. I am a far more professional business owner thanks to the discipline and structure that they require from us.

    I joined a network as a quick step to get my business up and running when I went it alone, but I’m impressed with my network and the original plan to go DA is now on hold.

    Bit of a shame that, now I run my own business, providers can’t take me out to lunch for fear of it being an inducement.

    • Roger

      Might I point out just two inaccuracies.

      1. It isn’t really your own business, just as a McDonalds operator doesn’t own McDonalds. You are a franchise operator.
      2. You may well be right with regards to some DA firms, but the big differences are that they didn’t run to hide under the skirts of the network and that if/when anything went wrong it came directly out of the owners pocket and could well put them out of business. Networks generally protected their biggest producers.

    • Morning Rodger

      You seem to think my comments are directed at the advisers under the network umbrella ! if so you couldn’t be further from the truth !

      My issue starts and stops with the network itself,

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