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Regulators are increasingly concerned about harm to consumers from conflicts of interest. Companies and individuals working in financial advice can avoid penalties by being on the front foot: taking steps to identify all potential conflicts and manage them on an ongoing basis.
Are your advisers given the target of increasing assets under ongoing advice, or incentivised to generate assets under management for in-house investment solutions? Do you charge large implementation fees (relative to advice fees) if clients accept a recommended transaction, or discount or waive advice fees for clients who sign up for ongoing advice? Does your business model rule out providing advice unless clients agree to sign up for ongoing advice, or prevent advisers opining on the suitability of clients’ existing investment holdings?
All of these are tell-tale signs of conflicts of interest. If they aren’t identified and carefully managed, they can result in advisers recommending products or services because of their revenue potential for themselves, rather than pointing out simpler and lower-cost solutions that could be more suitable, especially for smaller investors. There are many more potential conflicts, too: being an ‘independent’ advice business yet having an in-house investment solution, having default solutions that involve ongoing advice and investment management, valuing your advice business predominantly based on ongoing advice fee revenue, and so on.
Regulators are serious about conflicts of interest
The FCA increasingly emphasises that conflicts of interest represent a source of significant harm to consumers. In addition to Dear CEO letters on the subject, a recent Sector View report discussed how consumers are currently being pushed towards high-risk retail investment products, exposing them to more risk than they can afford to take. The FCA expects companies to take reasonable steps to identify any conflicts and then to manage these risks effectively.
Firms and individuals overlook regulatory expectations at their peril. In April, the Insolvency Service banned adviser Gerard Blakemore from being a company director for eight years after he allegedly recommended that clients invest in a high-risk overseas company in which he had a personal interest. An extreme example, perhaps, but a reminder that regulators mean business.
To tackle conflicts of interest proactively, you need to identify and review all conflicts, put in place the right management mechanisms, and make sure your firm has the right culture to prevent more conflicts from arising.
Identify conflicts
However confident you may feel about this area, it’s worth taking another look at your conflicts register, your compliance monitoring outputs and a sample of your client files.
Check that each conflict your firm is faced with is included in the register, together with adequate detail of the controls in place to mitigate and manage it. Consider whether your monitoring activities generate enough management information to demonstrate that you’re managing conflicts effectively.
Many firms will find that they have overlooked or failed to manage some sources of conflict. Charging structures are an area for special attention. These are most obviously an issue in defined benefit pension transfer advice, where ‘contingent charging’ models are common, and a recommended transfer can generate ongoing advice and investment management fees. However, recent FCA communications indicate that conflicts from charging structures are one of the main drivers of unsuitable advice across the financial planning sector.
Establish effective management processes
Checking for conflicts of interest is not a one-off exercise. You must be able to evidence that you manage them adequately on an ongoing basis – which means integrating identification and management of conflicts into your overall control framework.
Potential conflicts should be considered throughout the advice process, starting with product governance (for example, target market assessment and proposition development). The company’s conflicts register must be a live document, detailing the controls in place and reviewed regularly by senior management, not just by compliance.
Create the right culture
Your conflicts framework will only be truly effective with the right organisational culture in place. This starts with providing conflicts of interest training to all relevant frontline staff – training that must be tailored to your specific sector and business model. Training enhances awareness and shows that your firm takes conflicts of interest seriously.
In addition to training, you need to consider whether your compliance monitoring approach assesses conflicts adequately. Also consider whether employees’ targets and remuneration/promotion packages inadvertently encourage conflicts.
Senior managers and HR staff need to be aware of issues around conflicts so that they can provide adequate oversight and challenge – for example, before they sign off on employee performance assessment schemes. The necessary awareness can again be provided through training.
How Bovill can help
External advice can be helpful with all three of the areas outlined above: identifying overlooked conflicts of interest, ensuring that the right management mechanisms are in place, and promoting the appropriate culture. Bovill’s familiarity with best practice in this area – and with the pitfalls – means we are ideally placed to help.
Please get in touch if you would like to discuss how we can work together.
