With the publication of the Mifid II Delegated Acts, firms have been left in no doubt that when it comes to the future of inducements, their days are numbered.
An inducement has been defined as a fee, commission or other non-monetary benefit designed to enhance the service provided to clients. To accept this type of payment, it must have a clear, demonstrable effect on the level of service a client receives and must not benefit the firm over the needs of the client.
The FCA, however, has a different view on whether to continue to allow inducements within the industry. The concern is that these Mifid II restrictions may not be enough to prevent the risk of distorting customer outcomes, particularly if advisers are incentivised to select commission-paying funds over the non-paying kind. It’s simply not a risk worth taking for the FCA in its aim of ensuring appropriate consumer outcomes across all the sectors it regulates.
On this point, the FCA has already proposed a blanket removal of all commission and other forms of inducements for discretionary investment managers, based on the findings of its thematic work that some firms were accepting inducements that didn’t directly benefit the client. It’s widely expected that the FCA will go ahead with its proposed ban to ensure consumers receive the right outcomes, bringing its approach in line with its inducement rules in other sectors, including the ban on commission brought about by the Retail Distribution Review.
The FCA is expected to confirm its final approach to implementing Mifid II over the coming year, with the directive due to come into force in January 2018. In the meantime, firms should be focusing their attention on current policies and processes around inducements and conflicts of interest more widely. Carrying out a gap analysis of current arrangements against the upcoming requirements will allow firms to accurately plan for the changes that may be required to comply with Mifid II regulations when they finally come into force.
Being able to effectively distinguish between appropriate and inappropriate inducements will be key come January 2018. The FCA’s thematic work in this area identified cases where permitted benefits were being offered alongside those that failed to meet the requirements, such as evening dinners following a conference or training session. It’s not enough to accept or provide benefits where one component complies with the industry’s inducement rules; all parts must be fully compliant and each benefit must be reviewed separately. Having robust systems, monitored by staff with the appropriate training and knowledge, should help to identify those non-compliant benefits and avoid regulatory censure.
Firms are also expected to keep robust logs of all inducements accepted, including the recipient of the benefit, details of how it benefited clients and its value. Not only will this help firms to evidence compliance, it will also enable them to provide transparent information to clients with a clear indication of the true value of the benefits received. The FCA and Esma continually refer to the clients’ best interest rule and if it cannot be deemed that there has been a benefit to clients, such as an improvement in service, then it will not be acceptable under the rules.
Whether the FCA opts to implement a complete ban on inducements or not is one part of the regulatory regime that is likely to receive considerable attention over the coming years. Firms should review their processes now and take any necessary action to ensure they are meeting regulatory expectations in this area.
Chris Martin is associate director at The Consulting Consortium