Advisers and providers share the burden of responsibility for managing potential conflicts of interest, the Financial Conduct Authority (FCA) has said in a guidance paper out today.
The finalised guidance on inducements outlined that both parties were equally liable for inducements in receiving and making payments under service and distribution agreements.
It stated that payments from product providers to advisory firms should be "based on reasonable reimbursement for the costs incurred by advisory firms".
Furthermore, any such payments "should always enhance the quality of service provided to customers".
In the paper the FCA lays the foundation to act before any conflict of interest is detected.
"We are concerned with both potential and actual conflicts," the FCA said.
"If a firm is in a situation where it could receive a benefit but has yet to receive it, we believe this is enough to impair the judgement of that firm, so the potential conflict needs to be managed in the same way as an actual conflict."
It also laid out its rules on provider panels used by both independent and restricted advisers.
"Where an advisory firm operates a panel of providers, the inclusion of providers on the panel should not be influenced by the provider’s willingness and ability to purchase significant services from, or provide other benefits to, the advisory firm.
"To do so is likely to result in a breach of Principle 8 because receiving payments or benefits may unduly influence the panel selection and lead to the advisory firm putting its commercial interests ahead of its customers’ interests. This applies to selecting providers for both independent and restricted panels."
The guidance followed a review that found payments were still being made that could result in advisory firms favouring one product provider over another, undermining the aims of the Retail Distribution Review (RDR).
The FCA reiterated that firms had to comply with the spirit of the RDR, which aimed to increase transparency and professional standards in the investment advice industry.
FCA director of supervision Clive Adamson said: "The rules on inducements and conflicts of interest are not new. However our review made it clear there were certain practices that did not stand up to scrutiny.
"In the guidance published today we are helping firms better understand our expectations. Now it is for firms to make sure any payments are legitimate, are in consumers' interest and that potential conflicts are well managed."
The original review, which was published in September, found a number of practices that gave cause for concern, including:
• Some payments by product providers to advisory firms appeared to be linked to securing sales of their products.
• Financial arrangements in place with product providers that potentially incentivised advisory firms to promote a specific provider's product to their advisers.
• Certain joint ventures, where a new investment proposition is jointly designed by providers and advisory firms, could create conflicts of interest and potentially lead to biased advice.
The FCA said it expected firms to review, and, if necessary, revise their existing agreements in light of the finalised guidance, and to do so within three months of its publication.
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