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FCA issues warning to advice firms on accepting hospitality from product providers


Financial advisers that accept invitations to sporting events, concerts or social events from product providers may be breaking conflict of interest rules, the Financial Conduct Authority (FCA) has warned.

The rules require that any payments or non-monetary benefits made to financial advisers by financial product providers must be "designed to enhance the quality of service to the client". The FCA found some examples of this not happening, of additional hospitality being provided in connection with benefits that did meet the requirements and of insufficient record keeping, in a review of advice firms' and providers' practices it conducted last year.

The FCA said that it did not intend to publish a full report on its findings, which it intends to take into account as part of the consultation process around the EU's revised Markets in Financial Instruments Directive (MiFID II). However, it has published its main findings in order to "remind firms of our expectations around the current rules" ahead of the delayed implementation of new EU-level rules, currently expected for 3 January 2018.

In its summary, the FCA said that accepting invitations for golfing, concerts or other hospitality events "did not appear capable of enhancing the quality of service to clients". These scenarios were either "not conducive to business discussions or the discussions could better take place without these activities", according to the regulator.

"When providing or receiving a non-monetary benefit we expect firms to consider and assess whether all aspects of the benefit are designed to enhance the quality of the service to the client including the location and nature of the venue, and those activities which are not conducive or required for business discussions," it said in its summary.

"Where an activity or event provides a number of non-monetary benefits, you must consider each benefit separately. Just because one benefit provided by the firm is designed to enhance the quality of service to a client and is capable of being paid or received without breaching the client's best interest rule does not mean that another benefit (that does not meet these requirements) can be included in or alongside the compliant activity or event," it said.

The FCA said that it had found some examples of attendees receiving evening dinners "which were not themselves designed to enhance the quality of service to clients" after conferences or training events; or of games of golf or tickets to rugby games provided following the training course. In addition, adviser logs of hospitality received did not always capture how the benefit was designed to enhance the quality of service to the client, or did not always include full details of the benefits received.

The regulator's guidance on inducements and conflicts of interest was finalised in January 2014, following concerns that non-monetary benefits offered to advisers by providers were undermining the objectives of the Retail Distribution Regime (RDR). The RDR rules, which came into force at the end of 2012, banned advisers from receiving commission payments from product providers in most cases. MiFID II, which will revise and update the existing EU-level regulatory rules for investment services, will further restrict third-party inducements in relation to services governed by the directive.

The FCA has also warned product providers not to make cash payments to advisers over and above what is required to cover the cost of facilitating training or courses on a provider's products, and reminded advisers governed by MiFID of the need to ensure that investor clients are properly informed of the value of any benefits provided to the adviser in relation to the product. The purpose of this requirement is to ensure that clients are aware of any possible inducements before deciding whether to go ahead with an investment.

Firms should "consider these findings and expectations" in order to ensure that they meet the current requirements, the FCA said. However, it does not intend to take any further action at this stage in relation to its findings.

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