Compliance Corner: RDR

In the second installment of our Compliance Corner series, Tim Chapman discusses the findings of a recent FCA review into whether firms continue to be influenced by inducements from product providers, despite this year’s retail distribution review (RDR).

Compliance Corner is our new series of blog posts looking at hot topics and trends within compliance and risk. Each month we’ll be discussing a different topic and sharing our insights into the impact they may have on the industry.

This month, Tim Chapman considers the results of a recent survey by the FCA into the continued practice of financial incentives and commission structures being offered to financial advisers.

RDR: Advisers Advised

Compliance corner RDRIn January 2013, the FCA banned the practice of insurers and wealth management firms providing financial incentives and commission structures to financial advisers to promote their products, due to the risks of pushed products not being in the interest of the customers. However, a recent survey has shown that this practice has, essentially, not stopped. The FCA highlighted on their retail distribution review (RDR) survey that:

 

  • “Some payments by life insurers to advisory firms appeared to be linked to securing sales of their products” and
  • “There were financial arrangements in place with life insurers that incentivised advisory firms to promote a specific provider’s product to their advisers”.

This also included an increase in spending on support services such as research, seminars, etc. The findings of the survey highlight that despite the RDR’s aim of removing commission bias, ‘backhanded’ settlements and incentives were still taking place, particularly in the life insurance market. This has highlighted a lingering bias of certain financial advisory firms in their promotion of particular firms and products, which are not always in the interests of the customer.

What can be done?

The FCA has recommended that firms should review their current practices and arrangements and, if needs be, the FCA will revisit this issue and arrange further involvement in the future. Many firms have already changed their arrangements and plans. The aim of the RDR review was to ‘mark a step’ away from financial advice that was influenced by commission, and instead become more customer centric and focus on the customers needs, subsequently aligning suitable products and firms against the needs of the customer.

The FCA has also issued documents to guide firms and give them advice on how to deal with providers that pay for certain aspects of their business, including training, hospitality, etc. and how best to ensure impartiality is at the heart of a financial adviser’s business practice.

Will this work?

As always, this is unclear. Many professionals thrive on lucrative bonuses and commission structures, but these practices lead to issues that affect the impartiality of their service. The FCA casting a light on the issue will also inform customers to be equally as objective when receiving advice, and to weigh up all their options; not just take an adviser’s opinion or guidance at face value.

This current survey has also encouraged increasing transparency on firms’ current practices and encouraged them to review their current procedures and incentives, following on from the FCA’s goal to get firms to regulate themselves.

 

At Grovelands we always want to hear from you. Do you think the FCA should delve deeper into the issue or let firms correct their own procedures? Tell us your thoughts in our LinkedIn group.

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