British regulators are cracking down on industry junkets and other sorts of conflict-creating inducements that can impact retail investment advice.
The U.K. Financial Conduct Authority (FCA) on Monday announced the key findings from a review carried out last year into inducements and the conflicts of interest that can be created for firms as a result.
The review follows guidance published by the FCA in January 2014 regarding practices that are likely to create conflicts that could undermine customers’ best interests.
The FCA’s rules in this area include a requirement that any payment or benefit provided to investment firms should be designed to enhance the quality of the service to the client. However, the review found that firms were provided with hospitality events, such as tickets to sporting events and concerts, that did not appear to do anything to enhance client service.
“These benefits did not appear capable of enhancing the quality of service to clients as they were either not conducive to business discussions or the discussions could better take place without these activities,” the FCA says in its announcement.
The FCA also warns that benefits, such as expensive dinners or sporting events, that are provided in conjunction with a legitimate training event also may violate its rules. “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,” the FCA announcement says.
The FCA reports that it also found evidence of product manufacturers providing excess payments to advisory firms, which were supposed to cover the costs that firms face when facilitating training, or distributing educational material supplied by the product firm. “Product providers were making payments to advisory firms in excess of the costs incurred,” the FCA announcement says.
“Providers may make payments to advisory firms to cover these costs, but these payments should only cover the costs incurred, and should not also include a profit for the advisory firm,” the announcement adds.