Published: 21st April 2016

Of Relevance To:

MiFID firms; firms undertaking business in respect of retail investment products

Inducements and Conflicts of Interest: Thematic Review

In January 2014 the FCA published Finalised Guidance FG14/01 “Supervising retail investment advice: inducements and conflicts of interest”. Although of general interest to all firms, the Guidance was particularly relevant to providers of, and firms providing advice on, retail investment products e.g. collective investment schemes, investment trusts etc.

FG14/01 drew attention to the ‘inducements’ rules in COBS 2.3 and identified cases where, in the FCA’s view, hospitality and gifts offered to firms was of ‘an unreasonable value’ with the concern that this could have led to a channelling of business to the provider.

In 2015 the FCA conducted a thematic review about benefits provided and received by firms that:

  • carry out regulated activities in relation to retail investment products
  • carry out MiFID business

Rather unusually for a thematic review, the FCA will not be publishing a report as the findings will feed into a planned MiFID II Consultation Paper (‘Policy Development Update No. 32’ published earlier this month advises that a further MiFID II Consultation Paper is scheduled for ‘Mid-2016’).

Given the delay in the implementation of MiFID II – see Regulatory Roundup 73 – the FCA has decided to publish the ‘key findings’ of the thematic review to remind firms of its expectations around the current rules.

Hospitality’ features in three of the five published findings. The themes here were either inadequate hospitality logs (‘Gifts and Benefits Register’) or benefits which the FCA did not view as being designed to enhance the quality of service to the client – events such as concerts, golf and tennis are mentioned as examples.

Although MiFID II is still a good year and a half away it is worth reminding ourselves that Article 24 of MiFID II (“General principles and information to clients”) includes a prohibition on the acceptance of, or the provision of, monetary and non-monetary benefits – subject to the limited exemptions therein. The draft Delegated Regulation published by the European Commission on 7 April expands on the area of ‘inducements’ (see Chapter IV) including e.g. the requirement that any fee, commission or non-monetary benefit should “not directly benefit the recipient firm, its shareholder or employees, without tangible benefit to the relevant client”.

Hopefully the forthcoming MiFID II Consultation Paper, and follow-up Feedback Statement/Policy Statement (and perhaps enhanced by ESMA Level 3 Guidelines and Q&As) will provide further guidance on regulatory expectations.

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