Last week the FCA published their findings of their 2015 thematic review of inducements and conflicts of interest on a new webpage.
The thematic review focused on benefits provided and received by firms carrying out MiFID business and firms carrying out regulated activities in relation to retail investment products. It follows on from the FCA's finalised guidance issued in January 2014 on inducements and conflicts of interest. The rule on inducements is set out in the FCA handbook and includes the requirement that a benefit given or received by a relevant firm "is designed to enhance the quality of the service to the client".
The FCA findings focus on hospitality, training costs and the level of transparency provided by firms to their clients in relation to benefits given and received. In summary the key findings were:
- Hospitality provided or received did not always appear to be designed to enhance the quality of service to the client e.g. sporting events which were not (in the FCA's view) conducive to business discussions. The FCA expects firms to consider and assess whether all aspects of the benefit are designed to enhance the quality of the service to the client.
- Each aspect of the hospitality offered needs to be considered separately. The FCA noted that some hospitality combines more than one benefit, for example sporting events or dinner (which may not meet the requirements of the rule on inducements) provided after training (which may meet such requirements). The FCA's view is that each event had to separately meet the requirements of the rule on inducements, and if it did not, that element of the hospitality was likely to breach the rule on inducements and should not be included.
- Hospitality logs did not always record relevant detail and were not always well maintained. The FCA noted that logs ought to contain details of how each benefit was designed to enhance the quality of the service to the client. The FCA added that enough detail needs to be recorded in the logs to “ensure effective monitoring and compliance” with the rule on inducements.
- While advisory firms incur costs when facilitating training or educational material supplied by product providers, there were circumstances where product providers were making payments in excess of the costs which is "likely to be an inducement and are not allowed".
- Details of the value of the benefits received by MiFID firms were not being provided to clients. While firms described the nature of benefits they received, they did not inform clients of the value of these types of benefit. The FCA noted that MiFID firms are obliged to disclose the value of such benefits to their clients, so that clients are "aware of the possible level of inducements" when deciding to proceed with the investment.
The FCA will not be publishing a thematic report, but work from the thematic review will inform their MiFID II consultation paper expected to be published this April. However, given that the implementation of MiFID II has now been postponed to January 2018 the FCA has published its key findings to remind firms of their obligations in relation to the rules currently in force.
Impact of the findings
The implications of these findings may be far-reaching, in particular for sporting events. The question which firms will need to answer is does attending the relevant sporting event actually assist a business discussion, as this appears to be the bar the FCA is setting. Further, compliance functions in both adviser and provider firms will need to ensure that hospitality logs contain sufficient detail regarding any hospitality given or received and a robust explanation of how such hospitality enhances the quality of the service provided to the client.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.