FCA fines Sesame Ltd for ‘pay-to-play’ arrangements

Published: 30/10/2014     Last Modified: 30/10/2014

Sesame Ltd, the UK’s largest network of financial advisers, has been fined £1,598,000 by the Financial Conduct Authority (FCA) for setting up a pay-to-play scheme. Sesame’s arrangement effectively undermined the ban on commission payments brought in by the Retail Distribution Review (RDR). The pay-to-play scheme meant that the range of products recommended to Sesame clients under its restricted advice service was influenced by the amount of services Sesame had sold to product providers.

The FCA found that Sesame promoted its own commercial interests over the interests of its clients.

Tracey McDermott, director of enforcement and financial crime, said:

“Firms must place customers at the heart of their business.  Our reforms were designed to ensure advice is based on what is best for the client not the adviser.  

“Firms can have had no doubt about the outcomes we were looking for here.  Sesame's approach to inducements, in the face of a clear position from the regulator, undermined the rules in order to look after its own interests.

“If we are to move on in financial services we must see firms focussing on how they achieve the best outcomes for their customers – not adopting practices that avoid our rules.”

In December 2012, new rules, known as the Retail Distribution Review (RDR), were introduced to the financial advice market. Paying commission to advisers for selling a retail investment product was banned. The change was to ensure that customers receive advice which is not influenced by the amount of commission paid to advisers and that product providers compete on the price and quality of their products. This means that prospective investors pay for advice directly.

Additionally, advisory firms have to clearly disclose whether they offer independent or restricted advice and advisers are required to meet certain professional standards.

As a result of the reforms, Sesame decided that its network of advisers would offer a restricted service. This meant that advisers could only recommend a restricted number of products (known as a panel) from pre-selected providers, instead of offering products from across the whole market. To establish these panels, Sesame ran a tender process in which it asked providers what services they were prepared to pay the Sesame Group for providing. During the selection process, Sesame told a number of providers that it expected them to spend an extra £250,000 a year on services to be placed on one of Sesame’s restricted advice panels.  

In one case, a provider included its budget for services from Sesame, for the years 2012 to 2016, in its initial response to the tender. Sesame reviewed the response and the firm requested that the provider increase its budget for services by £750,000 per annum for the years 2014 to 2016.

As a result of the tender process, inclusion on restricted advice panels was influenced by how much providers were willing to pay Sesame for additional services. This practice had the effect of undermining the ban on commission payments. In so doing, Sesame failed to manage the conflict between its commercial interests and those of its clients.

Sesame settled the case at the first opportunity and, as a result, qualified for a 30 per cent discount. Were it not for that Sesame would have been fined £2,282,902, which reflects the fact that this is the fourth time the regulator has had to fine the network.

Notes to editors

  1. Final Notice for Sesame
  2. In the Final Notice, the FCA finds that Sesame fell short of Principle 8 by failing to properly manage conflicts of interest.
    In addition, Sesame fell foul of the FCA’s conduct of business rule COBS 2.3.1R, which states:
    A firm must not pay or accept any fee or commission, or provide or receive any non-monetary benefit, in relation to designated investment business.
  3. Previous final notices for Sesame:
    1. June 2013, fined £6,031,200 for failing to ensure advice was suitable
    2. April 2007, fined £330,000 failures in relation to its complaints handling of SCARPs
    3. October 2004, fined £290,000 for failing to monitor one an adviser within its network engaged in pension unlocking
  4. Final guidance: Supervising retail investment advice: inducements and conflicts of interest.
  5. On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
  6. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
  7. Find out more information about the FCA.

 

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