One of the central objectives of the RDR is to remove the risk of prejudice to consumers arising from conflicts of interest resulting from remuneration arrangements between investment product providers and advisory firms.
On 16 January 2014, the FCA published its final guidance (the Guidance) on inducements and preventing conflicts of interest, as set out in Principle 8, the COBS inducement rules and SYSC (the Handbook Rules). The FCA expect relevant firms to review, and if necessary revise, their existing agreements in the light of this finalised guidance within three months of its publication – ie by mid-April 2014.
The Guidance is directly relevant to all advisers and providers of retail investment products. The Guidance applies to advisers and any advisory firm providing personal recommendations in relation to retail investment products. The FCA also state that they expect providers of mortgage or protection business to be mindful of these Guidelines.
The guidance does not make any amendments to the Handbook’s Rules; however it does provide clarification of practices that it considers to be unacceptable, and thus a breach of the Rules. The Guidance also gives examples of good practices.
According to the Guidance, the following are examples of poor practice which are likely to breach Principle 8 (Conflicts of Interest):
- Longer term multi-year agreements between providers and advisory firms;
- Clauses in contracts that allow the provider to negotiate a reduced level of payments for reduced levels of services if the provider loses its place on the advisory firm’s panel, or where there is a material reduction in sales of the provider’s products;
- Contracts between providers and advisory firms for services that result in advisory firms obtaining payments from providers that exceed the reimbursement of costs incurred, and are linked (whether directly or indirectly) to distribution of the provider’s products;
- Those staff in advisory firm’s functions who are responsible for providing information and guidance to advisers on the benefits and features of products, also having responsibility for negotiating and providing services to providers.
In relation to compliance with the COBS inducement rules, the Guidance notes that the following are examples of good practice:
Where the benefit -
- was reasonable and proportionate;
- was of a limited scale and nature;
- did not need to be relied on 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 from the advisory firm to the provider; and
- did not result in the advisory firm recovering more than its reasonable costs.
The Guidance suggests that payments which go beyond the reimbursement of costs are likely to create unmanageable conflicts of interest in the advisory firm. The Guidance also reviews typical provisions in specific contracts such as IT development and maintenance, training, conferences and seminars and management information, data and research services. It recommends that any firm considering launching a joint venture between a provider and an advisory firm discuss their plans with the FCA to ensure that such proposed joint venture is consistent with the RDR and designed with the end customer in mind.