Don’t forget inducements
3rd October 2016
In January 2014 the FCA issued Finalised Guidance 14/1: Supervising retail investment advice: inducements and conflicts of interest. This explained their concerns and why certain practices are likely to create conflicts of interest and result in firms not acting in their customers’ best interests. They said we would consider further action if we found continuing issues.
In April 2016, the FCA published their key findings from the 2015 thematic review about benefits provided and received by firms conducting MiFID business, and those carrying out regulated activities in relation to a retail investment product.
The key findings were:
- 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, e.g. 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.
- Hospitality logs did not always record relevant detail or were not well maintained. For example, logs did not always capture how the benefit was designed to enhance the quality of service to the client.
- Advisory firms incur costs when facilitating training or educational material supplied by product providers (e.g. setting up a webinar on the advisory firm’s system) 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, e.g. training. 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.
The message from the FCA is clear: firms should consider these findings and expectations and ensure they meet the current requirements. Also, the policy followed should be consistent and apply to everyone in a firm not just some categories of employee.