Wednesday, 18 September 2013 10:09
FCA says evidence of life insurers and advisers 'undermining' RDR
The Financial Conduct Authority says some life insurance firms have 'arrangements' in place which could influence advisers in contravention of the principles of the RDR and it has referred two firms for enforcement.
The FCA has not made clear exactly what inducements are under investigation and what contraventions have occurred but they are believed to relate to benefits and support provided to advisers in non-commission areas such as IT, staff training and hospitality.
The FCA published its review today on whether firms continue to be influenced by inducements from product providers, despite the Retail Distribution Review (RDR) coming into effect in January 2013. The review found some life insurance firms had arrangements in place which could influence advisers, contrary to the RDR's aim of removing commission bias in financial advice, says the FCA.
The watchdog says that many of the firms involved in the review have changed their arrangements as a result of early action by the regulator. Two firms have been referred to enforcement in specific cases where the FCA identified potential rule breaches.
Alongside the review, proposed guidance has been published to help firms further understand how they should act. The guidance explains why the FCA thinks certain payments between providers and advisers may cause conflicts of interest and also gives some helpful examples of good and bad practice. This includes how advisory firms might want to deal with conflicts caused by providers paying for IT development and maintenance, staff training, conferences and seminars, hospitality, research and promotional activities.
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Clive Adamson, the FCA's director of supervision, said: "The changes we made to the retail investment advice sector were designed to mark a step change in the way advice was given. It signalled the end of advice that might be influenced by the commission payments made by product providers to advisory firms, and the start of a new era of trust and transparency between a firm and its customers. The findings of this review reveal that the actions of some firms have the effect of undermining the objectives of the RDR.
"Most the firms involved in the review have already made changes, which are welcome, but we want all firms in this market to review and, if necessary revise their existing arrangements. We will revisit this area in the future to check that the necessary improvements have been made."
The RDR came into force on 31 December 2012 and made significant changes to the investment advice market. It made clear how much consumers pay for financial advice, what they pay for, and improved professional standards by introducing a minimum level of qualification for all investment advisers.
The FCA asked 26 life insurers and advisory firms to provide information about their service or distribution agreements; in total it received and reviewed 80 agreements. The FCA's findings included:
· Some payments by life insurers to advisory firms appeared to be linked to securing sales of their products; this included an increase in spending on support services (such as research or management information) provided by advice firms in the lead up to, and after the implementation of, the new advice rules. In many cases the FCA did not think the business benefit of these increases was justified nor did it improve the quality of service to the customer.
· There were financial arrangements in place with life insurers that incentivised advisory firms to promote a specific provider's product to their advisers, creating a risk that advice would be influenced more by commercial decisions than the interests of customers.
· The FCA also identified that certain joint ventures, where a new investment proposition is jointly designed by providers and advisory firms, could create conflicts of interest and potentially lead to biased advice. In one example, the advisory firm was paid substantial up-front fees by the provider with its profits increasing the more it channelled business into the joint venture.
The FCA guidance consultation is open until 18 October 2013.
Maggie Craig, director of Financial Conduct Regulation at the Association of British Insurers, said the ABI would work with the FCA to help develop its guidance on inducements.
She said: “The ABI welcomes the publication of the FCA Guidance Consultation on inducements and conflicts of interest. The paper is helpful in providing guidance for providers and distributors, particularly in how the rules interact with the new RDR framework. It is encouraging to see that there is good practice in this area and that the FCA has acknowledged that many firms have already taken action to improve their practices and the systems and controls around inducements.
“Today’s publication is a good start, but we do believe that more clarity regarding FCA expectations in this area would be helpful in some areas, particularly around initiatives such as joint ventures."
The FCA has not made clear exactly what inducements are under investigation and what contraventions have occurred but they are believed to relate to benefits and support provided to advisers in non-commission areas such as IT, staff training and hospitality.
The FCA published its review today on whether firms continue to be influenced by inducements from product providers, despite the Retail Distribution Review (RDR) coming into effect in January 2013. The review found some life insurance firms had arrangements in place which could influence advisers, contrary to the RDR's aim of removing commission bias in financial advice, says the FCA.
The watchdog says that many of the firms involved in the review have changed their arrangements as a result of early action by the regulator. Two firms have been referred to enforcement in specific cases where the FCA identified potential rule breaches.
Alongside the review, proposed guidance has been published to help firms further understand how they should act. The guidance explains why the FCA thinks certain payments between providers and advisers may cause conflicts of interest and also gives some helpful examples of good and bad practice. This includes how advisory firms might want to deal with conflicts caused by providers paying for IT development and maintenance, staff training, conferences and seminars, hospitality, research and promotional activities.
{desktop}{/desktop}{mobile}{/mobile}
Clive Adamson, the FCA's director of supervision, said: "The changes we made to the retail investment advice sector were designed to mark a step change in the way advice was given. It signalled the end of advice that might be influenced by the commission payments made by product providers to advisory firms, and the start of a new era of trust and transparency between a firm and its customers. The findings of this review reveal that the actions of some firms have the effect of undermining the objectives of the RDR.
"Most the firms involved in the review have already made changes, which are welcome, but we want all firms in this market to review and, if necessary revise their existing arrangements. We will revisit this area in the future to check that the necessary improvements have been made."
The RDR came into force on 31 December 2012 and made significant changes to the investment advice market. It made clear how much consumers pay for financial advice, what they pay for, and improved professional standards by introducing a minimum level of qualification for all investment advisers.
The FCA asked 26 life insurers and advisory firms to provide information about their service or distribution agreements; in total it received and reviewed 80 agreements. The FCA's findings included:
· Some payments by life insurers to advisory firms appeared to be linked to securing sales of their products; this included an increase in spending on support services (such as research or management information) provided by advice firms in the lead up to, and after the implementation of, the new advice rules. In many cases the FCA did not think the business benefit of these increases was justified nor did it improve the quality of service to the customer.
· There were financial arrangements in place with life insurers that incentivised advisory firms to promote a specific provider's product to their advisers, creating a risk that advice would be influenced more by commercial decisions than the interests of customers.
· The FCA also identified that certain joint ventures, where a new investment proposition is jointly designed by providers and advisory firms, could create conflicts of interest and potentially lead to biased advice. In one example, the advisory firm was paid substantial up-front fees by the provider with its profits increasing the more it channelled business into the joint venture.
The FCA guidance consultation is open until 18 October 2013.
Maggie Craig, director of Financial Conduct Regulation at the Association of British Insurers, said the ABI would work with the FCA to help develop its guidance on inducements.
She said: “The ABI welcomes the publication of the FCA Guidance Consultation on inducements and conflicts of interest. The paper is helpful in providing guidance for providers and distributors, particularly in how the rules interact with the new RDR framework. It is encouraging to see that there is good practice in this area and that the FCA has acknowledged that many firms have already taken action to improve their practices and the systems and controls around inducements.
“Today’s publication is a good start, but we do believe that more clarity regarding FCA expectations in this area would be helpful in some areas, particularly around initiatives such as joint ventures."
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