FCA’s Key Findings on Inducements and Conflicts of Interest 16/08
10th May 2016
In January 2014 the FCA issued Finalised Guidance explaining their concerns in regard to why certain practices are likely to create conflicts of interest and result in firms not acting in their customers’ best interests.
In 2015 the regulator conducted a thematic review about benefits provided and received by firms that:
- carry out MiFID business
- carry out regulated activities in relation to a retail investment product.
For these types of firms the inducement rules (COBS 2.3) include the requirement that any payment or benefit is designed to enhance the quality of the service to the client.
The FCA have now published their key findings from the review to remind firms of the expectations around the current rules.
What firms were doing
|Hospitality provided or received did not always appear to be designed to enhance the quality of service to the client.||Individuals from firms had participated in or spectated at sporting or social events, such as golf, tennis, concerts. These benefits did not appear capable of enhancing the quality of service to clients as they were either not conducive to business discussions or the discussions could better take place without these activities.||When providing or receiving a non-monetary benefit, firms should 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, and those activities which are not conducive or required for business discussions, such as sporting and social events and activities.|
|Hospitality that is not designed to enhance the quality of service to clients being offered in connection with other benefits that do meet the requirements||There were instances of sporting activities like playing golf or attending rugby games provided after participation in training events. Evening dinners, which were not themselves designed to enhance the quality of service to clients, were also provided to local attendees after conferences.||Where an activity or event provides a number of non-monetary benefits, firms must consider each benefit separately. Just because one benefit provided by the firm 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 does not mean that another benefit (that does not meet these requirements) can be included in or alongside the compliant activity or event.|
|Hospitality logs did not always record relevant detail or were not well maintained||Logs did not always capture how the benefit was designed to enhance the quality of service to the client. This included situations where some benefits had not been recorded at all, as well as situations where full details (including who the recipient of the benefit was) were not recorded.||Sufficient detail should be recorded to ensure effective monitoring and compliance.|
|Advisory firms incur costs when facilitating training or educational material supplied by product providers||Product providers were making payments to advisory firms in excess of the costs incurred.||Providers may make payments to advisory firms to cover these costs, but these payments should only cover the costs incurred, and should not also include a profit for the advisory firm. Payments in excess of the costs incurred are likely to be an inducement and are not allowed.|
|MiFID firms were not providing clients with an indication of the value of allowable benefits provided||While firms were describing the nature of the benefits, they did not give investors an indication of the value of such benefits.||When disclosing a summary of the allowable benefits provided, MiFID firms must ensure clients are given an indication of the value of those benefits in order for the client to be aware of the possible level of inducements. Clients may then decide whether to go ahead with the investment or seek more detailed information.|
The FCA has chosen not to publish a full thematic report on this subject as this work will be taken into account in their planned MiFID II consultation paper.
MiFID II will introduce a new inducements regime for firms. While restrictions on inducements applying to investment firms more generally will remain substantively unchanged, from MiFID II’s implementation date (expected to be January 2018), portfolio management and independent advisory firms will only be able to accept and retain minor, non-material benefits subject to certain criteria being satisfied.
As always, please contact a member of the CPA compliance team if you have any questions or queries
© CPA Audit LLP 2019.