The FCA has revealed two firms are facing enforcement action after a thematic review found evidence that arrangements between providers and advice firms could undermine the RDR.
The regulator asked 26 life insurers and advisory firms to provide information about their service or distribution agreements. It received and reviewed 80 agreements and found that just over half of the firms had deals in place which could breach inducement rules.
The FCA’s findings included:
- Some payments by life insurers to advisory firms appeared to be linked to securing sales of their products; this included an increase in spending on support services (such as research or management information) provided by advice firms in the lead up to, and after the implementation of, the new advice rules. In many cases the FCA did not think the business benefit of these increases was justified nor did it improve the quality of service to the customer.
- There were financial arrangements in place with life insurers that incentivised advisory firms to promote a specific provider’s product to their advisers, creating a risk that advice would be influenced more by commercial decisions than the interests of customers.
- Further, the FCA also identified that certain joint ventures, where a new investment proposition is jointly designed by providers and advisory firms, could create conflicts of interest and potentially lead to biased advice. In one example, the advisory firm was paid substantial up-front fees by the provider with its profits increasing the more it channelled business into the joint venture.
FCA director of supervision Clive Adamson says: “The changes we made to the retail investment advice sector were designed to mark a step change in the way advice was given.
“It signalled the end of advice that might be influenced by the commission payments made by product providers to advisory firms, and the start of a new era of trust and transparency between a firm and its customers. The findings of this review reveal that the actions of some firms have the effect of undermining the objectives of the RDR.
“Most the firms involved in the review have already made changes, which are welcome, but we want all firms in this market to review and, if necessary revise their existing arrangements.
“We will revisit this area in the future to check that the necessary improvements have been made.”
Responding to the review, Association of British Insurers director of financial conduct regulation Maggie Craig says: “The ABI welcomes the publication of the FCA guidance consultation on inducements and conflicts of interest. The paper is helpful in providing guidance for providers and distributors, particularly in how the rules interact with the new RDR framework.
“Today’s publication is a good start, but we do believe more clarity regarding FCA expectations in this area would be helpful in some areas, particularly around initiatives such as joint ventures.
“The ABI will be responding to the FCA and will continue to work with them to develop their final guidance on inducements.”