On 18 April 2016 the FCA published the findings resulting from its thematic review on the benefits provided and received by firms conducting MiFID business, and those carrying out regulated activities in relation to a retail investment product.

The FCA decided not to publish a report instead publishing its findings on its website. It indicated that it will take its findings into account in its planned MiFID II consultation paper. However, in light of the delay in MiFID II implementation to 3 January 2018, the FCA indicated that it wished to remind firms of its expectations relating to the current regime. Its findings, which we cover in more detail below, have the following implications for investment firms:

  • Ensure that you consider and assess whether all aspects of a benefit, e.g. hospitality, are designed to enhance the quality of the service to the client.
  • Ensure that you consider each element of a benefit, e.g. attendance at a sporting event alongside training, to ensure that is designed to enhance the quality of service to clients.
  • Ensure that hospitality logs are kept up to date.
  • As a product provider, ensure that payments for training and educational materials only cover the costs incurred by the advisory firms using them.
  • As a MiFID firm, ensure that, when disclosing a summary of the allowable benefits provided, you give clients an indication of the value of those benefits.

Under current FCA rules (as set out in COBS 2.3), there are restrictions on when a firm can offer or accept a payment including a non-monetary benefit. While some of the rules are applicable ‘across the board’ there are some that are restricted to certain types of business in limited situations. Firms should make sure any such payments or offers of hospitality are in line with these requirements. To do otherwise would constitute a breach of the rules as well as presenting possible conflicts of interest. In particular, the current rules apply predominately to firms giving a personal recommendation in relation to a retail investment product or P2P agreement and the giving of advice or providing services to an employer in connection with a group personal pension scheme or group stakeholder pension scheme.

Finding 1: Hospitality provided or received did not always appear to be designed to enhance the quality of service to the client

The FCA found that individuals from investment firms (Firms) had participated in or spectated at sporting or social events, e.g. golf, tennis, concerts. These benefits did not appear capable of enhancing the quality of service to clients as they were either not conducive to business discussions or the discussions could better take place without these activities.

Action points for Firms:

  • When providing or receiving a non-monetary benefit, you should consider and assess whether all aspects of the benefit are designed to enhance the quality of the service to the client.
  • This includes the location and nature of the venue, and those activities which are not conducive or required for business discussions, e.g. sporting and social events and activities.

Finding 2: Hospitality that is not designed to enhance the quality of service to clients is offered in connection with other benefits that do meet the requirements

The FCA identified instances of sporting activities like playing golf or attending rugby games provided after participation in training events. It also found that evening dinners, which were not themselves designed to enhance the quality of service to clients, were also provided to local attendees after conferences.

Action points for Firms:

  • Where an activity or event provides a number of non-monetary benefits, you must consider each benefit separately.
  • Just because one benefit which you provide is designed to enhance the quality of service to a client and is capable of being paid or received without breaching the client’s best interest rule, this does not mean that another benefit (that does not meet these requirements) can be included in or alongside the compliant activity or event.

Finding 3: Hospitality logs did not always record relevant detail or were not well maintained

The FCA cited examples of logs that did not always capture how the benefit was designed to enhance the quality of service to the client. It noted instances where some benefits had not been recorded at all, as well as examples where full details (including who the recipient of the benefit was) were not recorded.

Action point for Firms:

  • You must ensure that sufficient detail should be recorded to ensure effective monitoring and compliance.

Finding 4: Advisory firms incur costs when facilitating training or educational material supplied by product providers

The FCA identified the example of setting up a webinar on the advisory firm’s systems and the collection of management information on behalf of a product provider. It also found that product providers were making payments to advisory firms in excess of the costs incurred.

Action points for Firms:

  • Where you are a product provider, you may make payments to advisory firms to cover the costs of training and educational materials.
  • However, you must ensure that these payments only cover the costs incurred and do not also include a profit for the advisory firm. (Payments in excess of the costs incurred are likely to be an inducement and are not allowed.)

Finding 5: MiFID firms were not providing clients with an indication of the value of allowable benefits provided

The FCA cited the example of training noting that, although it saw firms describing the nature of the benefits, they did not give investors an indication of the value of such benefits.

Action point for Firms:

  • Where you are a MiFID Firm, you must ensure that, when disclosing a summary of the allowable benefits provided, you give clients an indication of the value of those benefits in order for the client to be aware of the possible level of inducements. (Clients may then decide whether to go ahead with the investment or seek more detailed information.)