The UK’s Financial Conduct Authority (FCA) has found some life insurance and advisory firms have arrangements in place which could influence advisors’ actions despite the Retail Distribution Review’s (RDR) ban on commission.
RDR bans financial advisors from taking commission payments from fund managers in exchange for recommending their wares to clients.
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The FCA has published a review to find out whether firms continue to be influenced by inducements from product providers despite the retail distribution review (RDR) coming into effect in January this year.
The FCA said that its review had unearthed "serious concerns and a poor management culture in some firms whose actions have the effect of undermining the objectives of RDR".
Agreements at more than half of the firms reviewed "could breach Principle 8 and the inducements rules and so undermine the objectives of the RDR," the FCA found.
The FCA asked 26 life insurers and advisory firms to provide information about their service or distribution agreements; in total it received and reviewed 80 agreements.
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By GlobalDataThe regulator said that just over half the firms it sampled had agreements in place which it considered to breach its inducement rules and the objectives of the RDR.
It also identified concerns over certain types of joint ventures between providers and advice firms which were no consistent with the objectives of the RDR.
The FCA’s findings included:
- 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.
