Out-Law / Your Daily Need-To-Know

Product providers' payments to support service firms could be banned by FCA

Out-Law News | 22 Aug 2013 | 3:57 pm | 2 min. read

Retail investment product providers could face restrictions on the way they pay for support services used by financial advisers.

According to a report by Money Marketing, the Financial Conduct Authority (FCA) is looking into ways to bring support services used by financial advisers into the scope of rules that place a general ban on the payment of fees, commission or non-monetary benefits as 'inducements'.

The publication reported that the FCA has written to some product providers to notify them of its intention to clamp down on advisers profiting through arrangements in the distribution channel for retail investment products. Sometimes product providers will pay towards the cost of marketing products offered for sale on platforms.

"Where the sole purpose of a company which is not regulated is to service the intermediary market" that company should be treated as being one which is regulated by the FCA, the regulator wrote in its correspondence, according to the Money Marketing report. The report said that there may be legal barriers that prevent the FCA treating non-regulated companies as regulated ones in these circumstances.

In a statement the FCA would only say that it would be "publishing guidance on inducements for consultation in September".

Currently 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.

Previously the former City watchdog, the Financial Services Authority (FSA), wrote to the chief executives of a number of life insurance providers and financial adviser companies seeking assurances that they were not negotiating payment arrangements that flout rules on adviser charging which came into force at the end of last year under the Retail Distribution Review (RDR) regime.

The regulator raised concerns about the way that some providers were paying for advisers to attend conferences, training or seminars, or in the way that they were helping pay distributors to promote their products or set up new IT systems.

In circumstances where "payments made by a provider to a distributor represent a key source of revenue for the distributor" a firm may "put its commercial interests ahead of the best interests of its customers," the FSA said at the time. Any payments or benefits negotiated between companies must serve to "enhance the quality of service provided to the client." If they don't, those arrangements would be "prohibited", it said.

The FSA said that companies that pay to help distributors promote their retail investment products can only, generally, pay an amount that covers the costs involved in that promotion. Even then those cost-covering payments would only be justified if it can be shown that there has been an "enhancement of the quality of its service to clients" by distributors, it said.

“The regulator has always been suspicious of payments that appear simply to replace lost commission for advisers following RDR," said financial services law specialist Tobin Ashby of Pinsent Masons, the law firm behind Out-Law.com. "The FCA is following up on the FSA’s lead by trying to close a perceived loophole which allows profit to be earned on services it feels are too closely linked to advice. If the FCA wants to achieve greater clarity in this area on the extent of their reach beyond regulated firms, their consultation should consider carefully the potential consequences of this regulatory creep.”

Under the RDR regime, financial advisers are required to inform clients whether they are providing advice on an 'independent' or 'restricted' basis, and they are prohibited from receiving commission from product providers or fund managers for recommending to clients that they invest in particular products or funds. In the case of advised sales, advisers can only be paid for their services by their clients.