"In short, their stance has been that any payment - or other benefit which is paid or received - must enhance the quality of the service to the client."
In short, their stance has been that any payment - or other benefit which is paid or received - must enhance the quality of the service to the client. In the reports following previous reviews, the outcomes were expressed as high level principles. However, in the most recently published update, further guidance has now been added which sets out specific expectations on various types of activities. These expectations are set out below and it’s important that you consider where you have to manage any future conflict of interest or implement any changes to your existing processes.
Hopefully having more detail on the regulator’s expectations regarding incentives will help you put a definite structure in place to ensure you’re fully compliant when it comes to incentives.
FCA findings: Hospitality provided or received is not designed to enhance the quality of service to the client, and is often offered in connection with other benefits that do meet the requirements.
Individuals from firms had participated in or spectated at sporting or social events which 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. Evening dinners, which were not themselves designed to enhance the quality of service to clients, were also provided to local attendees after conferences.
FCA expectations: When providing or receiving a non-monetary benefit, the FCA 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.
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 can be included in or alongside the compliant activity or event.
FCA findings: Advisory firms incur costs when facilitating training or educational material supplied by product providers and when collecting management information on behalf of a product provider. Product providers were making payments to advisory firms in excess of the costs incurred.
FCA expectations: 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. Payments in excess of the costs incurred are likely to be an inducement and are not allowed.
FCA findings: MiFID firms were not providing clients with an indication of the value of allowable benefits provided, e.g. training. Firms describing the nature of the benefits did not give investors an indication of the value of such benefits.
FCA expectations: When disclosing a summary of the allowable benefits provided, MiFID firms must ensure clients are given an indication of the value of those benefits in order for the client to be aware of the possible level of inducements. Clients may then decide whether to go ahead with the investment or seek more detailed information.
