The Retail Distribution Review was implemented in January this year and brought in new rules which banned commission payments from being made by financial product providers to independent financial advisers.
However, the FCA said a review of 80 agreements between 26 life insurers and advisers revealed that more than half of the firms had agreements it considered “could influence advisers, contrary to the RDR’s aim of removing commission bias in financial advice”.
Specifically, the regulator said the firms could be in breach of Principle 8 of the FCA’s Principles for Businesses which states that “firms must be mindful of conflicts of interest between itself and its customers, and between a customer and another client”.
‘All firms should review existing arrangements’
Clive Adamson, the FCA’s director of supervision 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.”
Some of the particularly worrying findings include:
- 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 publication of a review into the adoption of the RDR by firms had been anticipated and in April the FCA confirmed to International Adviser it would be looking into whether firms are “circumventing” the RDR.
In response to the findings, the FCA has also published new guidance on inducements which is available here.
