FCA calls a halt to ongoing commission on retail products

FCA guidance on inducements will put an end to ongoing commission paid by distributors to advisers in the UK

hand-pushing-away
FCA sees end to commission

Members of the UK structured products industry that pay or profit from commission resulting from deals drawn up before 2013 will have to rework their contracts by April, following new guidance issued by the Financial Conduct Authority (FCA).

The regulator published finalised guidance on January 16 that aims to clarify rules set out in a consultation exercise on Supervising retail investment advice: inducements and conflicts of interest, which followed the introduction of the Retail Distribution Review at the end of 2012.

The FCA has listed several examples of what it considers bad practice, including an advisory firm that "relies on the ongoing revenue generated from such agreements to sustain its business", because "this is likely to create conflicts of interest that cannot be effectively managed."

As a result, banks will be busy negotiating the costs involved for advisers selling structured products, says Nicola Higgs, senior associate at law firm Ashurst in London. "Banks that sell these products are conducting a wholesale review of their distribution agreements to see what they're going to have to do to amend those clauses," says Higgs. "It's going to be difficult. Most will have hundreds of these agreements in place - they'll be trying to negotiate with distributors, particularly those that aren't otherwise subject to that rule [on ongoing commissions]."

The consultation, to which 25 parties replied - including life asset managers, advisory firms and trade associations - also shone a light on controversy relating to payments for so-called management information, where distributors pay advisers for providing details about sales data in order to gain a better understanding of the success of competitors' offerings. Such data has historically cost distributors thousands of pounds, despite it being easy to provide, and therefore could be seen as an inducement. Some respondents felt that any profit in this area created a conflict of interest, while others thought that it acceptable for advisory firms to earn "reasonable profit".

It's going to be difficult. Most will have hundreds of these agreements in place

Together with data and research costs, management information payments must be declared by both advisers and providers. "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 service," states the FCA. But management costs are not that easy to define, says Higgs. Rather than trying to work out the costs involved, most distributors will ask advisers to invoice these fees, thereby putting the onus on them.

The other issue raised by the FCA relating to inducements concerns institutions selling products through third parties. The guidance states that "payments made/received should always enhance the quality of the service provided to customers". Firms selling via a third-party distributor, especially if they are abroad, will find it difficult to state that the payment is enhancing the service to the underlying investor because they have no other contact with them and no oversight over the service. As a result of the new guidance, distributors of structured products to third parties will have to raise their due diligence and provide a rationale outlining how payments to third-party distributors are enhancing the service for their clients, says Higgs.

The consultation relating to Supervising retail investment advice: inducements and conflicts of interest ran from September 18 to October 18, 2013.

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