New FCA guidance seeks to ensure product provider payments do not influence retail investment advice

Out-Law News | 16 Jan 2014 | 4:08 pm | 4 min. read

Retail investment product providers and financial advisers face a clampdown on the type and levels of payments that can be made between them under new guidelines outlined by the Financial Conduct Authority (FCA).

The regulator's new guidance sets parameters on the kinds of arrangements that often sees product providers pay financial advisers to, for example, hold or attend conferences or seminars on the products they are selling, or to undertake training or update IT systems to account for new products those providers offer.

The FCA has issued the guidance in response to concerns that businesses were seeking to get around rules that ban product providers paying commission to financial advisers by putting in place alternative payment arrangements in an effort to influence distribution. It has said it wants to ensure that the payments between product providers and advisers are in line with rules on inducements and conflicts of interest.

Businesses have been given three months to revise existing agreements to comply with the new guidance.

"In response to the industry’s feedback last year, the FCA has made some important changes and sharpened up its final guidance which now contains much more clarity on the FCA’s expectations of good practice," said insurance law expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com. "The clearer guidance on good and poor practices, whilst not exhaustive, will be very much welcomed, if not well liked in some cases, as this is an area where getting the right balance and exercising commercial judgement can be difficult to get right."

"The new guidance supports the RDR objectives to reduce provider bias and applies to all providers, and not just life insurers, of retail investment products and advisory firms. There are no new rules but there is plenty of new guidance for firms, both providers and advisers, to think about in the next three months," he said.

Geiringer said that some existing distribution agreements contain quite substantial support arrangements that the companies involved would have to bring to an end "in a fairly short period of time". He said that doing so in such a timeframe could "jeopardise some business models where provider support has been crucial for survival".

"Hopefully there will not be many in that boat as this final guidance has been a long time coming," the expert said. "But, with bank advisers now virtually non-existent and no replacement emerging for the mass market to obtain advice, this has the potential to cause another significant structural shift in the provision of financial advice in the UK."

Geiringer also said that the FCA's guidelines and timeframe for action to be taken was a clear warning that enforcement action could be initiated if it finds continuing problems in the future.

"The FCA also took the opportunity to state that whilst the guidance does not apply to firms involved in mortgage and protection business, they are also reminded of the need to comply with the COBS principles, including principle eight concerning conflicts of interest, and so similar considerations will apply and such firms should 'act responsively' and not attempt to circumvent the guidance by making excessive payments for these products," he added. "The message from the FCA is clear: if in doubt about whether a payment complies with the guidance, don’t pay or accept it."

Under the COBS rules, it is possible for advisers to take advantage of certain "non-monetary benefits" offered by providers' retail investment products without falling foul of rules that place a general ban on the payment and receiving of inducements.

Those benefits, which may include assistance with product promotions and marketing, the provision of software or data processing facilities and training, must be "reasonable" in nature, must enhance the quality of service to an investor and are only legitimate if they can be paid and received without rules that require regulated businesses to act in their clients' best interests being breached.

The FCA's guidance will allow product providers to make a "proportionate contribution" to the costs advisers sustain in organising conferences or seminars.

Proportionality should be assessed through a consideration of what the adviser's total costs for the event are, the time given to addressing issues about the provider's products during the event and the number of advisers who attend, the regulator said. It said that it expects advisers to pay the "significant majority" of the overall costs for staging the event and that, where the event is held abroad, the entirety of the costs should be borne by advisers.

The FCA also said that it wants to restrict payments product providers make to advisers for IT systems development and maintenance to those that only cover "costs that are necessary to integrate and feed information into a provider’s IT systems". In addition, the payments must satisfy other conditions.

The payments must not impair an adviser's duty to act in the best interests of its clients, must be reasonably likely to "result in equivalent cost savings to the provider or its clients" and reasonably likely to ensure the quality of service to investors is enhanced, such as by "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 training, or training materials, provided by product providers to advisers must have the result of improving the quality of service those advisers offer to clients. In addition, advisers should not be paid more than the "reasonable costs" incurred in undertaking the training, it added.

The guidance also makes clear that product providers cannot provide training on an exclusive or restricted basis to one or only a handful of advisory firms.

"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, even if only on a first-come, first-served basis," the regulator said.

"We recognise that it can be cost effective for advisory firms to hold training events where providers deliver training on their products, and in these circumstances it is reasonable for the providers to share in the costs of arranging such training, provided it is UK-based. However, providers should be willing to offer similar training and associated payments to other advisory firms ... We do not expect the provision of training to result in a channelling of business to a provider or be dependent on appearance on a panel," it said.

The regulator said that it is the responsibility of both product providers and financial adviser businesses to ensure that payments made or received comply with the rules on inducements and that conflicts of interest are managed fairly.