Finalised Guidance: Inducements & Conflicts of Interest

One of the central objectives of the Retail Distribution Review (RDR) was to remove the potential for adviser remuneration to distort the advice consumers receive.

The FCA’s finalised guidance here sets out what is acceptable and what is not, and provides examples of good and poor practice. It’s not a long document and we strongly recommend that you go through it to ensure that you are not breaching rules and principles. By way of example, the provision of training by product providers could, if not handled correctly, create problems.

We don’t intend to repeat the content here as you can quickly find relevant information in the guidance, but here are some highlights to whet your appetite (please read the complete guidance for full understanding).

  • Firms should undertake their business in line with the 11 Principles for businesses;
  • Principle 8 requires that a firm must manage conflicts of interest fairly, both between itself and its customers and between one customer and another client;
  • SYSC 10 sets out specific rules in relation to identifying and managing conflicts of interest;
  • COBS 2.3 sets out the inducement rules;
  • Payments provided in relation to mortgage and protection business are still subject to the Principles for Businesses including Principle 8 (Conflicts of interest), and so similar considerations apply;
  • The FCA make it clear that they do not expect to see payments which result in, or could have the effect of resulting in, a channelling of business to a particular product provider;
  • Conflicts could be potential or actual;
  • Benefits can be monetary and non-monetary;
  • Advisory firms and providers should ensure that the risk of conflicts through offering or accepting any benefits is effectively managed so that accepting these payments does not impair their duty to act in the best interests of their customers;
  • Where an advisory firm operates a panel of providers, the inclusion of providers on the panel should not be influenced by the provider’s willingness and ability to purchase significant services from, or provide other benefits to, the advisory firm;
  • The COBS inducements rules ban the provision or receipt of any fees, commissions or non-monetary benefits, that relate to designated investment business carried on for a client, which impair the firm’s duty to act in the best interests of its client, are not designed to enhance the quality of service provided to a client or are not clearly disclosed to clients (with some exceptions);
  • COBS 2.3.15G gives guidance on the type of benefits that are capable of enhancing the quality of service provided;
  • There are disclosure rules that apply, as set out in COBS 2.3;
  • There were some common features of the types of benefits identified in the FCA review that they considered did not give rise to conflicts, i.e. the benefit was reasonable and proportionate; was of a limited scale and nature; did not need to be relied upon by the advisory firm in the future in order to continue to service its clients; could reasonably not be expected to result in the channelling of business to the provider; and did not result in the advisory firm recovering more than its reasonable costs;
  • Payments from providers for IT development and maintenance should be restricted to only those costs that are necessary to integrate and feed information into a provider’s IT systems;
  • Any IT related payments would need to satisfy the following conditions – providing or receiving a payment does not impair the firm’s duty to act in the best interests of its clients; the payments can reasonably be expected to result in equivalent cost savings to the provider or its clients; and the quality of service received by the client can reasonably be expected to be enhanced;
  • Guidance in COBS 2.3.15G states that a provider may provide an advisory firm with ‘training facilities of any kind (for example, lectures, venue, written material and software)’; however to comply with the inducements rules, the quality of service to the client must be enhanced as a result of such payments;
  • Advisory firms should only seek the reimbursement of the reasonable costs incurred in providing the training;
  • A provider giving an advisory firm training on the features and benefits of its products or services, or subject areas relating to the adviser’s continuing professional development (CPD), is unlikely to impair its compliance with the client’s best interests rule if the training is made reasonably available to all advisory firms that could recommend the provider’s products or services on an equal basis;
  • Guidance in COBS 2.3.15G states that ‘a provider may take part in a seminar organised by an advisory firm (or a third party) and pay towards the cost of the seminar if its participation is for a genuine business purpose and the contribution is reasonable and proportionate to its participation;
  • Guidance in COBS 2.3.15G states that a provider may give, and an advisory firm may receive, hospitality, gifts and promotional competition prizes of ‘a reasonable value’; as with other payments, any such payment should enhance the quality of the service provided to the client;
  • The FCA expectation is that providers and advisory firms should have a clearly defined policy, approved by an appropriate Approved Person (or Board Committee) for determining what constitutes reasonable hospitality and for authorising the provision or acceptance of such hospitality;
  • Guidance in COBS 2.3.15G states that a provider may assist an advisory firm to promote its products so that the quality of its service to clients is enhanced. Such assistance should not be of a kind or value that is likely to impair the advisory firm’s ability to pay due regard to the interests of its clients, and to give advice on, and recommend, products available from its whole range or ranges;
  • Guidance in COBS 2.3.15G states that a provider can supply draft articles, news items and financial promotions for publication in an advisory firm’s magazine, only if in each case any costs paid by the provider for placing the articles and financial promotions ‘are not more than market rate, and exclude distribution costs’;
  • Principle 3 requires a firm to take reasonable care to organise and control its affairs responsibly and effectively, with relevant risk management systems;
  • Under SYSC 3.1.1R a firm must take reasonable care to establish and maintain such systems and controls as are appropriate to its business;
  • Under SYSC 6.1.1R a firm must establish, implement and maintain adequate policies and procedures sufficient to ensure compliance with its obligations under the regulatory system.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

You might think that you are handling conflicts and inducements compliantly. This may very well be the case and indeed it is fair to say that most smaller firms these days receive very little by way of inducement or hospitality.

Nevertheless, this is a must read document, if only to provide peace of mind.

Action Required By You

Please read the guidance here in detail and with total objectivity.

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About the Author

Steve is an ATEB Director and has a deep understanding of all matter regulatory, built up over his 30 years + in the industry. With a training background and a technical brain, he overseas numerous complex projects and client implementation work.

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