The Financial Conduct Authority has published its finalised guidance on inducements for product providers and advisory firms.

The Financial Conduct Authority has published its finalised guidance on inducements for product providers and advisory firms.

According to the report, financial advisors and product providers now share the responsibility of managing potential conflicts of interests when receiving and making payments under service and distribution agreements.

The guidance states that payments from product providers to advisory firms should be based on reasonable reimbursement for the costs incurred by advisory firms and should always enhance the quality of service provided to customers.

"The rules on inducements and conflicts of interest are not new. However our review made it clear there were certain practices that did not stand up to scrutiny," said Clive Adamson, director of supervision at the FCA.

"In the guidance published today we are helping firms better understand our expectations. Now it is for firms to make sure any payments are legitimate, are in consumers’ interest and that potential conflicts are well managed,” added Adamson.

A review last September found that payments were still being made that could result in advisory firms favouring one product provider over another, undermining the aims of the Retail Distribution Review.

The FCA found a number practices that gave cause for concern, including payments by product providers to advisory firms linked to securing sales of their products and financial arrangements in place with product providers that potentially incentivised advisory firms to promote a specific provider’s product.

The regulator 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.

Struggle

Nicola Higgs, financial regulation lawyer at Ashurst, believes firms will have to make significant changes in order to comply with the new guidance and could struggle as a result.

"Retail investment product providers now have three months in which to review their distribution agreements against the FCA's examples of poor practice, and where necessary, negotiate new agreements with UK advisors. This is a big administrative task for firms given the high volumes of distribution agreements they have in place," said Higgs.

"Unless a firm can actively demonstrate how a commission payment enhances the quality of a service to a client, the payment should not be made. Firms have historically struggled to understand how to meet the FCA's objectives in this regard so this will not be an easy test to meet; long-term commission sharing and introducing broker agreements with no fixed end date are likely to be a thing of the past," she said.

Higgs said it would be difficult going forward for private wealth and asset management divisions of banks to solely advise on their own banks products.

"The FCA's product governance regime requires that firms obtain management information from their distribution channels. Some firms have to pay for this additional service provided to them. The guidance brings about a change in that going forward, the payment for these services will need to be disclosed to advised UK retail clients," said Higgs.