FCA publishes finalised guidance on inducements for product providers and advisory firms

In finalised guidance on inducements published today, the Financial Conduct Authority (FCA) makes it clear that financial advisers and product providers share the responsibility of managing potential conflicts of interests when receiving and making payments under service and distribution agreements.

The guidance follows a review that found payments were still being made that could result in advisory firms favouring one product provider over another, undermining the aims of the Retail Distribution Review (RDR). The FCA has been clear that firms have to comply with the spirit of the RDR, which aimed to increase transparency and professional standards in the investment advice industry.

Following consultation, the final inducements’ guidance states that payments from product providers to advisory firms should be based on reasonable reimbursement for the costs incurred by advisory firms. Furthermore, any such payments should always enhance the quality of service provided to customers.  The regulator has provided additional examples of good and poor practice, and guiding principles to further help industry.  

Clive Adamson, director of supervision at the FCA, says of the guidance:

“The rules on inducements and conflicts of interest are not new. However our review made it clear there were certain practices that did not stand up to scrutiny. In the guidance published today we are helping firms better understand our expectations. Now it is for firms to make sure any payments are legitimate, are in consumers’ interest and that potential conflicts are well managed.”

The original review was published in September and found a number of practices that gave cause for concern. They included:

• Some payments by product providers to advisory firms appeared to be linked to securing sales of their products.
• Financial arrangements in place with product providers that potentially incentivised advisory firms to promote a specific provider’s product to their advisers.
• Further, 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.

The FCA has published its finalised guidance together with a summary of the feedback received to the guidance consultation, to help firms better understand its expectations.  The FCA expects firms to review, and, if necessary, revise their existing agreements in light of the finalised guidance, and to do so within three months of its publication.

Notes for editors

1. The FCA’s finalised guidance on inducements[1].
2. Feedback to the FCA’s consultation paper[2] on inducements.
3. The FCA’s consultation paper on guidance on inducements[3].
4. The FCA’s rules on inducements[4] can be found in the FCA handbook.
5. Principle 8 of the FCA’s Principles for Businesses[4] states that a firm must be mindful of conflicts of interest between itself and its customers, and between a customer and another client.
6. On 31 December 2012 new rules on investment advice[5] came into force.
7. On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
8. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
9. Find out more information about the FCA.