Summary of feedback received

Transcription

1 Summary of feedback received January 2014 Consultation title Supervising retail investment advice: inducements and conflicts of interest. Date of consultation 18 September 18 October 2013 We received 25 responses to our guidance consultation from a range of respondents, including life insurers, asset managers, advisory firms, consumer representatives and trade associations. Respondents were generally supportive of the guidance, and welcomed the FCA clarifying its expectations of firms when entering into service and distribution agreements to help ensure compliance with the COBS inducements rules and Principle 8 (Conflicts of interest). Summary of feedback received A number of respondents felt that the guidance could be strengthened further by being clearer about the types and amounts of payments that we considered complied with the inducements rules and Principle 8. The respondents felt that this could be helpfully illustrated by giving further (and more detailed) examples of good and poor practice seen in our thematic review. Some respondents wanted us to consult on changes to the rules to address their concerns. However, we do not agree, as we consider the rules and Handbook guidance, together with our finalised guidance, are enough for firms to understand our requirements in this area and to make any necessary changes to their service and distribution agreements. In this section we summarise the key feedback received and our response to the feedback. Response to feedback received We are determined that the objectives of the Retail Distribution Review are not undermined and that our rules have the desired effect of helping ensure advisory firms do not solicit payments by entering into service or distribution agreements that could lead them to channel retail investment business to particular providers and affect the advice given to customers. Financial Conduct Authority Page 1 of 9

2 We are also determined that providers are not making such payments to secure distribution of their retail investment products and are, instead, competing on the price and quality of their products to secure distribution. (1) The rules and Handbook guidance are ambiguous and open to wide interpretation by firms, and so further clarity of the FCA s expectations would be helpful in the finalised guidance Furthermore, it was felt that there was an unfair competitive advantage for those firms prepared to take a more liberal approach to their interpretation of the rules and guidance, which was often backed up by external legal opinion. Respondents were very keen that there should be a level playing field in this area. Our response: We are providing further clarity to firms with publication of the finalised non-handbook guidance, but the COBS inducements rules, like many of our rules, require firms to exercise good judgement. If firms are not clear whether making or receiving a payment will be in line with the COBS inducements rules, the payment should not be made or accepted. We have strengthened the messaging in our finalised guidance to make clear what practices we consider to be unacceptable and likely to be in breach of our rules. In some instances we have included further examples of poor practices, or provided highlevel principles, to illustrate our concerns about a number of benefits that are included in the table of reasonable nonmonetary benefits at COBS G. The key changes are: IT development and maintenance (finalised guidance paragraphs 2.24 to 2.26) In the guidance consultation we gave examples of poor practices that could create conflicts of interest and were unlikely to be in the best interests of customers, and hence likely to be in breach of the COBS inducements rules. We have amended the guidance to make clear that we consider these practices do create conflicts of interest and would not be in line with the COBS 2.3 inducements rules. Training (finalised guidance paragraphs 2.27 to 2.29) In the guidance consultation we indicated that providers were permitted to reimburse the reasonable costs incurred by an advisory firm in organising a training event for its advisers. In response to the feedback received, in our guidance we recognise that it can be cost effective for advisers to hold training events where a number of providers deliver training on their products. In these circumstances we think it reasonable for providers to share the costs of arranging such training. However, we emphasise that the providers should be willing to offer similar training and payments to other advisory firms in accordance with Financial Conduct Authority Page 2 of 9

3 COBS G. We would also expect UK-based advisers to receive training in the UK and for the advisory firm to seek the reimbursement of the costs incurred in providing the training only. If there is any hospitality provided we expect our rules and guidance on hospitality payments to be followed. Hospitality and gifts (finalised guidance paragraphs 2.35 to 2.39) A number of respondents requested that our finalised guidance include examples of good and poor practice seen in our review. Rather than give specific examples of good and poor practice we think it is more useful to describe the characteristics of payments that we consider to be in compliance with the COBS inducements rules. Meetings with advisory firms (finalised guidance paragraphs 2.46 to 2.47) Our finalised guidance confirms that we consider payments from providers to advisory firms for meetings to be prohibited inducements. (2) The finalised guidance needs to be clear on the respective responsibilities of providers and advisory firms in complying with the COBS inducements rules and Principle 8 Some respondents said our guidance was unclear on the respective responsibilities between providers and advisory firms to ensure compliance with the relevant rules and principles. For example, some said that while providers should seek to benchmark proposed payments to advisory firms for services offered, providers should not be held responsible for determining whether the advisory firm s costs are reasonable, and that providers should be able to rely on the information given to them by the advisory firm without having to check that it was accurate or reasonable. In this regard some respondents felt that attestations from advisory firms should suffice. Some respondents were concerned that the FCA expected providers to be able to demonstrate that their selection on an advisory firm s panel was entirely independent of the range and amount of services it purchased from that advisory firm. It was not clear to the respondents how the provider could satisfy the FCA on this point as only the advisory firm could explain its rationale for placing a provider on its panel, and only the advisory firm would know if this decision had been influenced by the benefits and payments received from the provider. Some respondents felt that removing profit from the services offered by advisory firms would largely remove the risk that provider Financial Conduct Authority Page 3 of 9

4 selection on a panel was linked to the range and amount of services purchased. Our response: We recognise that it can be difficult for a provider to assess the impact a payment may have on an advisory firm. However, the COBS inducements rules place a requirement on the provider not to pay a fee, commission or non-monetary benefit that will breach the rules, and in our view, the greater the amount of payments made by the provider, the more likely a breach of the rules will occur. The rules bite on both parties to the transaction, i.e. on both the giver and receiver of the benefit or payment. We feel there is an onus on the giver to recognise that in making any payment there is a risk of a breach of the rules, and that it should take appropriate steps to satisfy itself that this is unlikely. For example, we do not think it unreasonable that a provider should conduct an audit of costs incurred by an advisory firm before any significant payments are made to that advisory firm. We agree with those respondents who said removing profit from services offered by advisory firms, while not removing conflicts of interest, would reduce the risk of any payments inappropriately influencing advisory firms in their selection of providers for panels. We set out our views on profit in the following subsection of this part of the paper. (3) The finalised guidance needs to be clearer on whether a profit can be made by advisory firms on services it offers to providers, and, if so, the basis on which such profit is considered by the FCA to be reasonable A number of respondents felt that our guidance was unclear on whether advisory firms were allowed to make a profit on the benefits and payments they received from providers. Some respondents thought that any profit resulted in a conflict of interest for the advisory firm that it would not be able to manage effectively, resulting in inappropriate behaviours and product recommendations that might not be in the best interests of customers. Other respondents thought it was acceptable for advisory firms to earn a reasonable profit and this should be determined by the market rate for the service. Although some also acknowledged that it was not always easy to determine what the market rate was for certain services, e.g. for management information offered by advisory firms. Other respondents understood the FCA s concern that payments for services that generated significant profits for advisory firms could result in a channelling of business to providers willing to make such payments. They requested that we include examples Financial Conduct Authority Page 4 of 9

5 in the finalised guidance of how providers could assess an advisory firm s costs and profit margins in a manner that would be acceptable to the FCA. Our response: Unless stated otherwise in the table of reasonable non-monetary benefits in COBS G, we believe that payments made to advisory firms for services relating to designated investment business should be restricted to the reimbursement of costs incurred by the advisory firm in supplying the services. We think that payments that go beyond the reimbursement of costs are likely to create unmanageable conflicts of interest in the advisory firm, and could lead to the channelling of business to those providers that are willing and able to make significant payments. Such payments would be in breach of the COBS inducements rules. Where payment at a market rate is expressly allowable in the table of non-monetary benefits in COBS G, i.e. in paragraph 6 in respect of financial promotions, then both providers and advisory firms are obliged to ascertain what constitutes the market rate for the particular financial promotion being placed, for example, by benchmarking against the cost to the provider in placing a financial promotion in a trade press publication or other suitable media aimed at the intended audience. (4) The finalised guidance needs to be clearer on whether the table of reasonable non-monetary benefits in COBS G includes payments for services, and whether payments for services fall within the COBS 2.3 inducements rules The table of reasonable non-monetary benefits in COBS G gives a list of the kind of benefits (in relation to the sale of retail investment products) which are capable of enhancing the quality of the service provided to a client and, depending on the circumstances, are capable of being paid or received without breaching the client s best interests rule. In some circumstances the table clearly envisages the making of a monetary payment by the provider to an advisory firm rather than the provision of a non-monetary benefit, e.g. in paragraph 6 (Financial Promotions), paragraph 10 (IT development) and paragraph 14 (reimbursement of reasonable expenses). Some respondents thought that the table should include permitted non-monetary benefits only (with any other nonmonetary benefits and payments expressly prohibited). Some respondents requested that our finalised guidance gives clarity on whether payments from providers to advisory firms for procuring certain services (such as data, management information and marketing services) are caught by the inducements rules. Our response: The table of reasonable non-monetary benefits is Financial Conduct Authority Page 5 of 9

6 not a definitive list of those non-monetary benefits and payments that can be automatically offered or received by a firm without breaching the inducements rules and it should not be read by firms as such. Any non-monetary benefits and payments that relate to firms designated investment business (whether they fall within the table or not) are caught by the inducements rules and our guidance. Given the nature of the business undertaken by firms is to advise on, manufacture, sell or undertake dealings in relation to designated investment business, the procurement or sale of most of the services we saw in our review was based on the desire to enhance the service or volume of these activities. On this basis we consider the procurement of these services is related to designated investment business and therefore subject to the COBS inducements rules. Although not specifically raised by respondents, we are aware that some providers have outsourced certain services to advisory firms that might typically have been performed by broker sales consultants within the providers. Such outsourced services include training on the providers IT new business systems and processes, and the performance of sales and campaign management services to ensure advisers are generating anticipated levels of quotes, and where they are not, the reasons why this is the case and any follow-up work required. We consider that any payments from a provider to an advisory firm for procuring services that relate to designated investment business are caught by the COBS inducements rules. As such, firms must satisfy themselves that they are complying with our rules and finalised guidance regarding the procurement of, and payment for, these services. (5) The finalised guidance could usefully include further examples of good and poor practice to illustrate the FCA s expectations of firms Some respondents asked us to include further examples of good and poor practice seen in our review to help illustrate our expectations of firms. Some providers were keen to see examples that included how reasonable costs could be determined for reimbursement to an advisory firm, e.g. for the provider s participation at an advisory firm s annual conference. Our response: We have included in the finalised guidance further examples of good and poor practice that we have seen in our thematic review, or other supervisory work. Where it has been impractical to give specific examples we have set out some highlevel principles that are more likely to result in payments or benefits from providers to advisory firms complying with the Financial Conduct Authority Page 6 of 9

7 COBS inducements rules. We have not included examples that illustrate how reasonable costs for reimbursement to advisory firms could be determined by providers as we think this simply creates unhelpful acceptable benchmarks for firms. We want firms to carefully consider whether a benefit offered or accepted is designed to enhance the quality of service to customers and does not impair compliance with firms duty to act in the best interests of their customers. (6) The scope of the proposed guidance does not include mortgage or protection business falling under the MCOB and ICOBS sourcebooks Some respondents pointed out to us that our guidance only applies to retail investment business, and not to mortgage or protection business. This created the risk that some providers might divert payments to advisory firms (that are prohibited under the COBS inducements rules) for services offered in connection with mortgage or protection business, effectively circumventing our guidance and seeking to secure distribution of investment products. Our response: Payments provided in relation to protection and mortgage business are still subject to the Principles for Businesses including Principle 8 (Conflicts of interest), and so similar considerations apply to such payments as outlined in our guidance. We expect firms to act responsibly and not attempt to circumvent this guidance by soliciting and making excessive payments for other product lines. (7) By not applying to vertically integrated firms our guidance gives such firms an unfair competitive advantage over firms that are not vertically integrated A number of respondents were concerned that our guidance consultation stated that it did not apply to firms within the same group that both manufacture and distribute their own retail investment products ( vertically integrated firms), and that this gave such firms a potentially unfair advantage over its nonvertically integrated competitor firms. Our response: Although our thematic review did not consider firms within the same group that both manufacture and distribute their own retail investment products, the COBS inducements rules and Principle 8 do apply in those circumstances where the product manufacturer and distributor are separate legal entities. These firms are likely, therefore, to find the messages in the finalised guidance relevant. Vertically integrated firms are also subject to rule COBS 6.1A.9R which requires the advisory firm to ensure that the level of its adviser charge is at least reasonably Financial Conduct Authority Page 7 of 9

8 representative of the services associated with making personal recommendations and related services. As such we do not consider our rules result in vertically integrated firms having an unfair competitive advantage over firms that are not vertically integrated. The finalised guidance has been amended to make clear that the COBS inducements rules apply to vertically integrated firms and that these firms are likely to find the messages contained in the guidance relevant. (8) The finalised guidance needs to be clearer on whether it is acceptable for providers to purchase management information from advisory firms, and whether advisory firms are able to make a profit on the provision of such management information A number of respondents considered that advisory firms had access to management information that was of genuine business benefit to providers, enabling them to design suitable products for their customers and to better understand their target market and customer base. So the respondents felt it very important that advisory firms be permitted to offer management information to providers who were willing to pay for it. Our response: We do not object to advisory firms providing providers with management information, data and research. We consider such information provides useful feedback to providers on who is buying their products and can feed into their product review and design processes. However, where such information is in relation to designated investment business (and we think in most circumstances that is likely to be the case) we believe that payments to advisory firms should be restricted to reimbursing the costs incurred only, for the reasons outlined on page 5. Both providers and advisory firms must be able to demonstrate that the information is expected to enhance the quality of service to customers. (9) The finalised guidance needs to provide clarity on how the inducements rules apply in respect of payments from providers to unregulated third parties that are for the ultimate benefit of an advisory firm Those respondents that commented on the scope and application of our guidance welcomed clarification that it extended to those circumstances when payments are made by providers to unregulated third parties that are for the ultimate benefit of an advisory firm. However, some respondents wanted to know whether we meant that the payments from providers were for the ultimate benefit of the advisory firm, or the services provided by the unregulated third party were for the benefit of the advisory firm. One respondent wanted to understand how the guidance would Financial Conduct Authority Page 8 of 9

9 apply in situations where the unregulated third party did not directly pass on the monetary benefit of its arrangements with a provider to an advisory firm. Was our intention to place onus solely on the providers we regulate for ensuring the guidance is met, rather than on the third party firms that we do not regulate? Our response: Our review identified two sets of circumstances, both of which are captured by our guidance: a) Where the unregulated third party is part of a wider group that includes a regulated advisory firm, and where services are offered and payments received by an unregulated firm in the group, but where the regulated advisory firm ultimately benefits financially. b) Where the unregulated third party is not part of a wider group that includes a regulated advisory firm and provides compliance support services to an advisory firm in return for a fee, and also supplies marketing support services to a provider in return for payment. In these circumstances we are concerned that the advisory firm could benefit financially if the payments from providers to the unregulated third party are in breach of the inducements rules as this could result in the channelling of business to those providers willing to make excessive payments. In both circumstances we are concerned that the payments from providers might impair the advisory firm s duty to act in the best interests of customers. Responsibility for ensuring compliance with our inducements rules and this guidance rests with the regulated firms, both the provider and advisory firm. Changes made to the guidance as a result of feedback received In response to feedback received (as outlined above) we have made some changes to the guidance to give greater clarity to our expectations of providers and advisory firms when entering into service or distribution agreements. We did not receive any specific comments on the cost benefit analysis and do not consider any other comments received to have an impact on it. Consequently, the cost benefit analysis has not been changed. You can access the full text of the guidance consulted on here Financial Conduct Authority Page 9 of 9