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7 point action plan to help conform to FCA inducement restrictions

ATEB Consulting’s Steve Bailey provides an insight into the FCA’s findings on inducements, what the regulator expects of firms and seven things firms can do to conform to those expectations

In 2015 the FCA 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.

This followed concerns that some business practices were likely to create conflicts of interest and result in firms not acting in their customers’ best interests.

Firms were reminded to ensure that any benefit or payment (made or received) is designed to enhance the quality of the service to the client.

The FCA has not published a full thematic report as this topic will be incorporated into further work being done in connection with the delayed MIFID II. However, the key findings have been published, alongside a reminder of the regulator’s expectations of firms.

FCA findings

• Hospitality did not always appear to be designed to enhance the quality of service to the client, e.g. sporting or social events;

• Hospitality that did not enhance the quality of service to the client, was offered alongside other benefits that do meet the requirements, e.g. golf or dinner after a training event;

• Hospitality logs did not always contain full details or record how the benefit was designed to enhance the quality of service;

• Adviser firms incurring costs, e.g. in connection with training by a provider, were being reimbursed in excess of the costs involved;

• Firms were not providing clients with an indication of the value of any allowable benefits received.

Clearly, the days when providers regularly offered social and sporting events to advisers are gone. However, there are still situations where benefits might be offered that are strictly not allowable on the basis that they do not enhance client service. In addition, even where a benefit is allowable, the potential conflict of interest needs to be managed properly. Often, all that is required is a disclosure to the client, including an indication of the nature of the relationship and the value of the benefit received. Some conflicts of interest do require to be ‘managed’ beyond a mere disclosure.

7 point action plan

Here are seven points recommended to help conform with the FCA’s expectations:

1. When providing or receiving a non-monetary benefit, consider and assess whether all aspects of the benefit are designed to enhance the quality of the service to the client;

2. Where an activity or event provides a number of non-monetary benefits, consider each benefit separately;

3. Ensure that the hospitality log records sufficient detail to facilitate effective monitoring and compliance;

4. Ensure that any payment for costs incurred covers the actual cost and does not include any element of profit;

5. When disclosing benefits to a client, include an indication of the value of the benefits in order for the client to be aware of the possible level of inducements;

6. Document a conflicts of interest policy that identifies the conflicts and how they are managed;

7. Ensure that your Conflicts Policy is up to date and reviewed annually.

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