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Two firms face FCA action over provider inducements

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.”



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There are 8 comments at the moment, we would love to hear your opinion too.

  1. On the face of it, the FCA would appear to be more than justified in its actions.

    Hopefully, this will buoy them on to investigate, and bring to book, a certain “upmarket” restricted firm that has gleefully stuck two fingers up at the RDR, and is paying its self-employed snake oil salespersons (sorry, ‘partners’) high levels of commission by another name.

  2. This is a positive move by the FCA. Dealing with ‘inducements’ should result in a more professional world, where the only commercial relationships which exist are between client and adviser.

    I wonder if part of the reason for these inducements continuing since the RDR is the lack of clear rules from the regulator. While most would interpret the commission ban in the widest possible sense, I guess others will always seek to apply rules in their own narrow interests.

    The financial weakness of some large networks and national IFA firms could also play a role here. If you are habitually loss-making, the ability to turn down a large cash payment from a product provider gets a whole lot harder.

  3. Good moves from the regulator; glad to see them looking at one of the main problems in the industry.

    One issue though, I hate to see them holding RDR out as being some kind of moral crusade. It will only work if the objectives are met. Unfortuantely, they have set those objectives incorrectly. Surely it should be about closing the savings/ pensions gap.

    Q: will more people have adequate provisions for their retirement in 2018 compared to 1988? Has RDR (and regulation in general) done anything to improve this?

  4. Is this a moral crusade or just another fund raiser for HM Gov. ?
    Please FCA do something positive to close the savings gap as the usual suspects will always find a route around the legislation and stick the proverbial fingers up.
    Can we ever get back to business as it’s Joe or Jo Public we need to be helping.

  5. It is logically the case that these adviser firms are of the larger variety. From other reports it would seem that this practice is widespread and it appears that about half of the firms in the thematic review are thwarting the intentions of RDR.

    Pound to a penny it’s not small firms. Could it be that some Networks and service providers are culpable? I have always wondered why life offices would buy a network – surely the pretence of independence is now being exposed. There are no free lunches and the investors who ploughed many millions into these concerns were always hoping for a return to the bottom line. It would seem that RDR has thwarted them.

    I wonder how many nefarious deals are struck in that annual jolly called PIMS? That the organisers only concentrate on firms with the biggest turnovers rather gives the game away. That they (the organisers) haven’t grasped the fact that the majority of firms have 5 RI or less and contribute in aggregate a very significant amount of business, rather demonstrates that they are the least corruptible. Perhaps not exclusively through a higher moral stance, but those who would do the corrupting can’t manage an effective campaign with such a disparate group.

    Notwithstanding all the hype to the contrary it seems that it is the smaller firm that will be the true beneficiary of RDR and that those forever foretelling of the demise of the little guy will yet again be forced to eat their words.

  6. Campbell Macpherson 18th September 2013 at 3:02 pm

    In the past, payments from providers to networks were the main way most networks were able to make a profit. This is obviously still the case for a small number of firms. For these networks, provider payments simply paper over the fact that their business model is simply not viable. By cracking down on this practice, the FCA will inevitably send such networks to the wall – or back to the “bank of Mum and Dad” (if they are owned by a big life company). Either way, this will be a good thing for the industry. I am a big fan of absolute transparency.

    The ironic thing about the whole situation is that these payments are rarely good business for the provider anyway. Providers soon realise that very few networks or service providers have genuine influence over their adviser customers when it comes to product sales, and even restricted networks can’t force their people to recommend products that their advisers regard as inferior. It will be good for all concerned to see the back of this nonsensical economics.

  7. Campbell Macpherson 18th September 2013 at 3:14 pm

    Hi Fee-Based Adviser. I disagree regarding St James Place. To my knowledge, from the outset their customers know they provide SJP solutions. They have a clever and enviable business model with satisfied customers who value the service they receive. Happy customers, successful advisers and growing employee numbers – sounds like the sweet smell of success to me!

  8. I might be going off topic slightly but yesterday the BBC ran an article about this on their website. The article included the statement that commission payments had been banned from providers to IFA’s and implied that this was the case for all products.

    Having slightly more time on my hands than usual i complained to the BBC that the article was factually incorrect and explained that commission was still acceptable in the event of an insurance only sale such as life cover or critical illness.

    The BBC to their credit contacted the FCA to confirm my point and by last night had responded to my complaint. This is part of the response email that i received from the BBC –

    “Having spoken to the FCA, I understand that advisers can still receive commission on insurance only products, although the FCA said very few IFAs would now sell such products.”

    Now i know that i don’t have contact with the entire IFA sector but i would be hard pressed to believe that the numbers of IFA’s providing advice on life insurance, critical illness and income protection would be difficult to describe as “very few”.

    Does the IFA have any idea what the average IFA does?

    Sorry for my slightly off topic rant but i just couldn’t believe the FCA and had to share.

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