We are publishing our key findings from the 2015 thematic review about benefits provided and received by firms conducting MiFID business, and those carrying out regulated activities in relation to a retail investment product.
In January 2014 we issued Finalised Guidance 14/1: Supervising retail investment advice: inducements and conflicts of interest. This explained our concerns and why certain practices are likely to create conflicts of interest and result in firms not acting in their customers’ best interests. We said we would consider further action if we found continuing issues.
In 2015 we conducted a thematic review about benefits provided and received by firms that:
- carry out MiFID business
- carry out regulated activities in relation to a retail investment product.
For these types of firms the inducement rules include the requirement that any payment or benefit is designed to enhance the quality of the service to the client.
We are not publishing a thematic report, as this work will be taken into account in our planned MiFID II consultation paper. However, given the recent European Parliament confirmation of the delay in implementing MiFID II to 3 January 2018, we are now publishing our key findings from the review to remind firms of our expectations around the current rules.
Key findings and expectations of firms
|Hospitality provided or received did not always appear to be designed to enhance the quality of service to the client. Individuals from firms had participated in or spectated at sporting or social events, eg golf, tennis, concerts. These benefits did not appear capable of enhancing the quality of service to clients as they were either not conducive to business discussions or the discussions could better take place without these activities.
|When providing or receiving a non-monetary benefit we expect firms to consider and assess whether all aspects of the benefit are designed to enhance the quality of the service to the client including the location and nature of the venue, and those activities which are not conducive or required for business discussions, eg sporting and social events and activities.
|Hospitality that is not designed to enhance the quality of service to clients is offered in connection with other benefits that do meet the requirements. There were instances of sporting activities like playing golf or attending rugby games provided after participation in training events. Evening dinners, which were not themselves designed to enhance the quality of service to clients, were also provided to local attendees after conferences.
|Where an activity or event provides a number of non-monetary benefits, you must consider each benefit separately. Just because one benefit provided by the firm is designed to enhance the quality of service to a client and is capable of being paid or received without breaching the client’s best interest rule does not mean that another benefit (that does not meet these requirements) can be included in or alongside the compliant activity or event.
|Hospitality logs did not always record relevant detail or were not well maintained. For example, logs did not always capture how the benefit was designed to enhance the quality of service to the client. We saw instances where some benefits had not been recorded at all, as well as examples where full details (including who the recipient of the benefit was) were not recorded.
|Sufficient detail should be recorded to ensure effective monitoring and compliance.
|Advisory firms incur costs when facilitating training or educational material supplied by product providers (eg setting up a webinar on the advisory firm’s systems) and when collecting management information on behalf of a product provider. Product providers were making payments to advisory firms in excess of the costs incurred.
|Providers may make payments to advisory firms to cover these costs, but these payments should only cover the costs incurred, and should not also include a profit for the advisory firm. Payments in excess of the costs incurred are likely to be an inducement and are not allowed.
|MiFID firms were not providing clients with an indication of the value of allowable benefits provided, eg training. While we saw firms describing the nature of the benefits, they did not give investors an indication of the value of such benefits.
|When disclosing a summary of the allowable benefits provided, MiFID firms must ensure clients are given an indication of the value of those benefits in order for the client to be aware of the possible level of inducements. Clients may then decide whether to go ahead with the investment or seek more detailed information.
Your firm should consider these findings and expectations and ensure they meet the current requirements.