FCA Publishes Key Findings of its Thematic Review of Inducements and Conflicts of Interest

The FCA published key high level findings from a 2015 thematic review of inducements and conflicts of interest on 18 April 2016. The review follows the FCA’s January 2014 publication of finalised guidance on inducements and conflicts of interest in the context of retail investment advice (FG14/1).

The FCA said it would not publish a separate report of this review because this work will be taken into account in its MiFID II consultation paper. However, given the delay in MiFID II implementation to 3 January 2018, it has decided to publish its key findings to remind firms of its expectations relating to the current rules.

The key findings of the review, which focussed on benefits provided and received by firms carrying out MiFID business and firms that carry out regulated activities relating to retail investment products, included:

• Hospitality, whether provided or received, did not always appear to be designed to enhance the quality of service to the client. The FCA said it expects firms to consider and assess whether all aspects of the benefit are designed to enhance the quality of the service to the client, including the location and nature of the venue, as well as activities that are not conducive or required for business discussions, eg sporting and social events.
• Hospitality that was not designed to enhance the quality of service to clients was sometimes offered in connection with other benefits that did meet the requirements. The FCA said that where an activity or event provides a number of non-monetary benefits, a firm must consider each benefit separately, and just because one benefit is designed to enhance the quality of service to a client and is capable of being paid or received without breaching the client's best interest rule, that does not mean that another benefit (not meeting these requirements) can be included with the compliant activity or event.
• Hospitality logs did not always record relevant detail, or were not well maintained. The FCA said sufficient detail should be recorded to ensure effective monitoring and compliance.
• Advisory firms incurred costs when facilitating training or educational material supplied by product providers and when collecting management information on behalf of a product provider. The FCA said product providers must not make payments to advisory firms in excess of the costs incurred. Such costs are likely to be an inducement and not allowed.
• MiFID firms did not always provide clients with an indication of the value of allowable benefits provided. The FCA said clients must be given this information, so that they are aware of the possible level of inducements, and can decide for themselves whether to go ahead with an investment or seek more detailed information.

Read the findings in full.

Financial Advice Market Review – Final Report Published

On 14 March 2016, HM Treasury and the FCA published the final report on the financial advice market review (FAMR), which was launched in August 2015 to identify areas for regulators and the government to help both consumers and the industry benefit from new and more cost-effective ways of delivering high quality investment advice and guidance.

The report sets out 28 recommendations intended to tackle the barriers to consumers hoping to access advice and are partly directed at the FCA and the government, and partly directed at employers, services providers and consumers, covering three key areas:

• Affordability: Recommendations to make the provision of mass market advice and guidance more cost-effective include:
  • the FCA should extend Project Innovate, and set up a dedicated team to help firms develop large-scale automated advice models bring these to market more quickly;
  • the FCA should consult on measures to support firms developing guidance services to help consumers make their own investment decisions; and
  • the government should consult on amending the statutory definition of regulated advice so that it must be based on a personal recommendation, in line with the definition set out in the Markets in Financial Instruments Directive (2004/39/EC) (MiFID). This would create a single definition for regulated financial advice, and remove some of the barriers that exist for firms wishing to offer guidance services.
• Accessibility: Recommendations to help consumers engage more effectively with advice include:
  • making consumers' own information more easily available to them and those who advise them, and the use of nudges to encourage customers to seek support at key life stages; and
  • measures to help employers give more support to their staff on financial matters.
• Liabilities and consumer redress: The report also included recommendations to increase clarity and transparency about the way in which the Financial Ombudsman Service (FOS) deals with consumer complaints and the funding of the Financial Services Compensation Scheme (FSCS) to provide greater certainty for advisors regarding their future liability while maintaining robust consumer protection.

The FCA and HM Treasury are asked to report on progress made in 12 months, and then to review the outcomes of the FAMR in 2019.

Read the final report in full.