Regulations around inducements are wider-reaching than ever before. The free-flowing champagne and jollies of decades gone by are now little but a distant memory. But the regulator is keeping a watchful eye on the industry for any sign of services and benefits that could cause bias.
The crackdown on so-called non-monetary benefits started several years ago. An FCA report in 2016 concluded that hospitality provided and received did not always enhance the quality of service given to clients.
The FCA said firms should consider the location and nature of activities, particularly those which were not conducive or required for business discussions. Among those it singled out were golf days, attending rugby games and evening dinners.
The watchdog later went on to look at whether free training services and events could be replacing traditional hospitality as a new form of inducement, and in January this year, Mifid II brought in even more stringent rules around non-monetary benefits from providers to advisers.
He thinks inducements are a good example of where positive progress has been made in regulation but adds that it is important providers are still able to deliver education training and support to advisers without fear of falling foul of the regulator.
Most recently, the regulator raised concerns that some free transfer value analysis reports appeared to be being offered to advisers with strings attached. It said accepting free TVAS or appropriate pension transfer analysis software was likely to fall within the new narrower definition around inducement rules and “should not be used”. As a result, a raft of providers stopped offering the reports or introduced a charge for the service.
However, several advisers have told Money Marketing that they believe the charges to advisers for these services, which can be as low as £75 from providers such as Novia, are set below the cost of actually providing them, so fear they may still be considered as an inducement to new business by acting as a loss leader.
One adviser says offers of portfolio research and analysis at conferences may be another area fund groups and advisers are found wanting over potential inducement violations.
The steady tightening of rules around inducements has left many wondering what could be next and whether regulation may now be so strict as to be detrimental to businesses. 7IM head of compliance David Ogden says: “I think hospitality has pretty much gone, especially for anyone who has influence over clients’ money. In some ways that’s a shame because it can be useful to form a social relationship with a business contact, but there is no doubt it was abused in the past.”
The traditional argument for hospitality, of course, is that it helps providers and advisers forge strong relationships that may lead to better client outcomes. The crackdown on these events marked a major change in direction for the industry.
7IM co-founder Justin Urquhart Stewart says: “I still love a ‘party pack’ with a pen I’ll never use or a charger that breaks after five minutes. These can be an awfully good insight into the compliance team at the company hosting an event.
“We’ve all been invited to those financial services events that only seem to focus on a new brand and a sales pitch. Anyone hosting or attending needs to ask how the event benefits the end client, and that’s a sensible approach.”
We’ve all been invited to events that only seem to focus on a new brand and a sales pitch
The list of acceptable events or services a provider can offer has certainly got shorter, but few argue that’s a bad thing.
Finalytiq director Abraham Okunsanya says that, as clients are usually indirectly paying for any services or tools an adviser uses, they should be able to have confidence that they are independent. Advisers, too, should be confident any software or reports they use are unbiased and will lead to the best client outcomes.
He says: “If I were going to the doctor and knew he was using tools paid for by a drug company, that would not make me feel confident about the consultation process. This is the same. Anything we can do to demonstrate to clients that we are doing our very best for them has to be a good thing.”
At the same time, the regulator needs to tread a fine line between stamping out any undesirable behaviour and not appearing draconian. That can create grey areas.
Okunsanya says: “The regulator tries to avoid being overly prescriptive and that means things are open to interpretation, but so is everything in this industry from due diligence to risk profiling, and I don’t think that’s a bad thing.”
Ogden adds: “The regulator can’t prescribe whether a Rich Tea biscuit is acceptable at a conference but a chocolate one isn’t. The most important thing for companies is to have a policy they’re comfortable with, stick to it and document it.”
The counter argument is that stricter regulation makes firms err too far on the side of caution. If businesses aren’t getting out to meet each other and build relationships it could lead to an information shortfall.
Aspect8 chartered financial planner Claire Walsh says: “I don’t have any problem with entertaining and I wouldn’t see it as an inducement. I’m going to recommend what I recommend regardless, but if someone wants to entertain me that’s a nice bonus. But I do think it’s right that there are tighter rules as it makes everything clearer for everyone.”
As Mifid II continues to bed in, the rules will continue to evolve as the regulator reacts to issues as they arise.