Heavy-handed regulation of arrangements between advisers and product providers may be to consumer detriment, warns expert after FCA issues inducements guidance

The Financial Conduct Authority (FCA) has released new guidelines for advisers and providers on inducements and on how to manage conflicts of interest that arise after identifying problems with the payments and benefits some life insurance companies offer advisers in a review of the market.

The regulator said that more than half of the companies assessed in the review may be non-compliant with conflict of interest rules and that, as a result, they may be undermining the objectives of the Retail Distribution Review (RDR) regime. The RDR rules, which came into force at the end of 2012, ban advisers from receiving commission payments from product providers in most cases. Instead, advisers are required to be paid by their clients for the personal retail investment advice they offer.

The FCA's draft guidance permits some payments and benefits to be accrued by advisers from product providers in some circumstances, but insurance law expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, warned that the restrictions the FCA has placed on the arrangements could inadvertently harm consumer interests.

"It is a shame that there have been some arrangements which have gone too far but they have existed in the market place for some time and generally they have not caused consumer detriment," Geiringer said. "They helped to enable the market to function. Some advisers are clearly going to suffer from not being able to rely on these arrangements any more and it may be that is a good thing."

"On the other hand, if that adds to the reduction in the availability of advisers, as has been seen in the first stages of the implementation of the RDR, then that is not necessarily a good price to pay from a consumer point of view. The key thing is to judge what is in the consumers’ best interests and forcing more adviser firms out of the market may not be the best solution if there is no alternative route to advice emerging from the market," he said.

"Adviser firms have always maintained that they are able to disassociate their recommendations and advice from any arrangement with a provider and maintain their integrity. That now will not be an issue with this guidance in place but how far will it go? Will ownership of adviser firms by providers be the next thing to go and what about commercial loans? If these are attacked, this would have a much more serious impact on the advice market and possibly be a bridge too far," the expert warned. 

"Providers, especially, life companies, are going to have take a very hard look at their distribution strategies and consider how they can best deliver their products to the market, be it via direct-to-consumer or re-establishing their own sales forces," he said.

In its consultation paper the FCA said that it had found examples in its review of life insurance product providers paying benefits to advisory firms "which appeared to be linked to securing sales of their products or services". Two companies, it said, may be subject to enforcement action.

The FCA warned advisers that operate a panel of product providers to ensure that they do not allow any payments or benefits they may receive from product providers to influence how they select that panel. The regulator said that advisers can legitimately provide retail investment advice to clients on the basis of products offered by a select panel of providers, but said that they must make sure that the panel reflects client interests.

"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 FCA said in new draft guidance (19-page / 197KB PDF) the regulator is consulting on.

"To do so is likely to result in a breach of [rules on conflict of interest] if the conflict is not fairly managed because the receipt of payments or benefits may unduly influence the panel selection and lead to the advisory firm putting its commercial interests ahead of its customers’ interests. This applies to the selection of providers for both independent and restricted panels," it said.

The FCA also warned that advisers should not accept payments product providers make to advisers to cover "support services" they offer, such as those around data and research, that are not "commensurate with the benefit obtained by the life insurer or its customers".

"Our rules do not prevent advisory firms from earning a reasonable profit (by charging a market rate) on services supplied to providers, but any profit increases the potential to create conflicts that need to be managed by firms," the FCA said. "Our concern about conflicts is heightened when the profit generated by providing specific services for providers is significant, as the greater the profit, the greater the risk that the advisory firm may recommend a particular provider’s product which may not be in the customer’s best interests."

The FCA also set out examples of payments that product providers had offered advisers for developing or maintaining IT systems that it said could breach rules on inducements and create a potential conflict of interest.

It said it would be likely to view payments from providers to advisers to help with IT development costs to "cause conflicts of interest that are not in customers’ best interests" if they were made at a point prior to it being possible to integrate the advisers' and providers' systems.

"We consider payments from providers to advisory firms for IT development and associated ongoing maintenance that are restricted to only those costs that are necessary to integrate and feed information into a provider’s IT systems are more likely to be acceptable if: providing or receiving such a payment does not impair the firm’s duty to act in the best interests of its customers; the payments can reasonably be expected to result in equivalent cost savings to the provider or its customers; the quality of service received by the customer can reasonably be expected to be enhanced by, for example, automating business processes to reduce the possibility of errors arising from manual processing and the time taken to process business," the FCA said.

The regulator said that whilst product providers can reimburse advisers their reasonable costs associated with attending training about their products, they should not pay, or otherwise incentivise, the advisers to attend training.

The FCA further called on advisory firms to have a clear policy on hospitality, to ensure that they do not accept anything more than "reasonable hospitality" from product providers.