FCA review finds evidence of life insurance and advisory firms ‘undermining the objectives of the RDR’ and consults on new guidance

The Financial Conduct Authority (FCA) has published a review to find out 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 published today 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.  

Many of the firms involved in this review have now changed their arrangements as a result of early action by the FCA. 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.

Clive Adamson, the FCA's director of supervision, commenting on the findings, 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.
• 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. 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 guidance consultation is open until 18 October 2013.

Notes for editors

1. The FCA review of inducements and proposed guidance[1].
2. The FCA’s rules on inducements[2] can be found in the FCA handbook.
3. Principle 8 of the FCA’s Principles for Businesses[3] states that firms must be mindful of conflicts of interest between itself and its customers, and between a customer and another client.
4. The FCA’s recent ‘Six months in…’ review[4] of the new investment advice rules.
5. On 31 December 2012 new rules on investment advice[5] came into force.
6. 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).
7. 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.
8. Find out more information about the FCA, as well as how it is different to the PRA.