The scenario: You are the CF10 compliance officer of a wealth management firm. You are aware of the recent publication of a guidance consultation paper by the FCA that addresses the issues of inducements and conflicts of interest. You are also aware of the FCA’s recent approach to firms and the regulator’s interest in how firms are run to ensure appropriate consumer outcomes, rather than what systems and controls they have, and this has now prompted you to question your own firm’s approach.
Points to consider: The FCA has recently expressed concerns that some firms entered into agreements with providers that could potentially result in the channelling of business to certain providers, and that this could ultimately affect the impartiality of advice given to clients. This is in contrast to the desired effect of the Retail Distribution Review where the removal of commission bias was designed to ensure that providers competed on the price and quality of products and that intermediary firms were not unduly influenced by payments received from providers when providing advice to clients.
It is clear that in the FCA’s review there have been providers who have made inappropriate payments to firms to secure distribution of their products, either through direct payments for business written or through increased spending on services provided by intermediary firms where such spending or increases in spending were not justified. Another example of a cause for concern to the FCA was the issue of joint ventures where payments for the intermediary appeared to be disproportionate to that party’s involvement in the joint venture.
Although the issues of conflicts of interest and inducements are unchanged in the rules, you have decided to review how your firm approaches this subject afresh alongside a review of your incentives and remuneration structures and responsibilities under the Bribery Act.
In your review, you will look at the agreements that you have with providers to ensure that your firm could not be perceived as seeking any additional and inappropriate payments for distribution of products. You will also review relationships with providers to identify any incidents of unsolicited benefits, monetary or otherwise. As you operate a panel of approved providers, your review will focus on how providers are selected, whether there are any links between benefits from providers and access to the panel and whether there is any conflict between the people who are responsible for agreeing the panel make-up and those who provide guidance on product features to the advisers in your firm.
You are fully aware of the rules and requirements of the conflict of interest rules in SYSC 10 of the FCA handbook, but are also cognisant of the importance of the rules in COBS 2.3 relating to inducements, as you see this as an area of potentially greater concern. This echoes the FCA’s view on inducements where weaknesses were found in firms’ approaches to IT development, training, seminars, hospitality, promotional activity, meetings and management information or research services.
Your intention will be for the results of your review to feed in to your overall risk appetite linked to conduct and result in a communication and training session for all staff to ensure that there is increased awareness and familiarity with what activity is acceptable to your business, what is not acceptable and that the conduct behaviours of your firm remain fully aligned to your client service.
Simon Collins is managing director at RGP Compliance