Inhospitable climate

New FCA guidelines on inducements are forcing fund groups to cross events off their corporate hospitality calendars

Sipping champagne at the test match at Lord’s, watching the tennis from your seat on Wimbledon’s centre court, or taking the helm of a yacht during Cowes Week: just some of the perks enjoyed in a financial sector where entertaining distributors to help win new business or reward profitable partners has long been the norm. Indeed, there are more than a few fund managers that could adopt the Robbie Williams song Let Me Entertain You as their anthem.

Entertaining clients in this manner, however, could soon become a thing of the past. The Financial Conduct Authority (FCA) published new guidelines in January this year on inducements and conflicts of interest relating to corporate hospitality. The guidelines, which follow on from the Retail Distribution Review, ban financial advisers from providing extravagant entertainment that might lure intermediaries' business to particular fund firms.
"A lot of investment companies are being much more careful about events they put on"The guidelines have created a headache for the UK's fund groups and asset managers, which are also having to get to grips with the FCA’s new rules on dealing commission related to research (an issue covered by the Review in its January 2014 edition). Aberdeen Asset Management, which sponsors events such as Cowes Week in August, has said its compliance teams are looking at the guidelines relating to hospitality very seriously. Aegon, the asset management company that sponsors top tennis tournaments including the Aegon Championships at Queen’s Club in London in June, has said it too is reviewing the rules. Meanwhile, there are already reports of funds cancelling events for fear of falling foul of the new guidelines.

“A lot of investment companies are being much more careful about events they put on, while many are trimming their invite lists,” says Bella Caridade-Ferreira, CEO of Fundscape, which specialises in research and analysis of the UK fund industry. “A company such as M&G that sponsors the Chelsea Flower Show, for instance, may still sponsor an event, but may not take as many intermediaries to it.”

There will also be people who have been invited to events but will turn down their invitation because their compliance team has told them to do so, she adds. “We are going to see a fair amount of upheaval and I think a lot of events will be curtailed.”

 

Industry response

The show must go onWith corporate hospitality often arranged months in advance, the best-laid plans of many a fund manager will have been thrown into disarray by the FCA guidelines.

“Hospitality around events already booked will now be reviewed but often, when a financial commitment has already been made, it can be very difficult to get out of,” says Fundscape’s Bella Caridade-Ferreira. “If you are concerned that an event might fall foul of the new guidelines but have already invited people, then you might have no choice but to go ahead with the event.”

If cancelling invitations proves impractical, then you need to be able to prove it, she warns. “It is important you can show that you have looked at cancelling the event but, due to the expense involved or arrangements already made by those attending, you are committed to the event.”

With investment firms grappling with what is acceptable under the new guidelines, the Investment Management Association (IMA) is seeking clarity from the FCA. The IMA has drafted its own industry guidance to help its members follow the regulator’s requirements, but before the Association sends a draft version out to its members, it wants to make sure that the FCA does not have any issue with what the guidance says. The IMA has sent the draft to the FCA and is awaiting a response.

The FCA says that for an event to be viewed as acceptable under the new guidelines, it must be in the best interests of the customer. An FCA spokesperson told the Review: “Our review made it clear there were certain practices that did not stand up to scrutiny. The guidance we issued was aimed at helping firms better understand our expectations.

“We have been liaising closely with the industry since and now it is for firms to make sure any payments, hospitality or gifts are legitimate, proportionate, in consumers’ interests, and that potential conflicts are well managed.”

Yet determining what is ‘legitimate’ and ‘proportionate’ is tricky, notes Holly Mackay, Managing Director of The Platforum, an investment platforms adviser that recently chaired an industry roundtable discussion on the new guidelines.

“There is always an element of interpretation around regulatory guidelines which include the word ‘reasonable’,” says Mackay. “We think the more flash corporate hospitality involving marquees, champagne, three-course meals and ringside seats are probably pushing it too far, but a steak and a few glasses of red with clients feels OK to us.”

 

Educational events

While the more extravagant outings might have to be crossed off the calendar, fund groups should not be deterred altogether from holding events that mix business with pleasure, adds Mackay.

“The old pretence of a few PowerPoint slides at the beginning of a golf day won’t really fool anyone, but neither do we think the more cautious compliance officers should pull educational events which help keep advisers appraised of markets, products, regulation and tax changes, for example,” she says. “The starting point should not be trying to retrofit an event into the rules; it should be whether it is an event which adds some end benefits to clients and does not exist solely to reward advisers for putting business the providers’ way.”

Ultimately, the key to getting corporate hospitality right under the new guidelines is to do your homework, trust your judgment and keep a detailed record of your events planning, advises Caridade-Ferreira. “Satisfy yourself that you have gone through the rules properly, are justified in what you are doing and have documented everything,” she urges. “If you do all that, then I think the FCA will look much more kindly on you and your firm.”

It will be interesting to see how the FCA responds to the IMA’s own guidelines, but for now, the best course of action for fund and asset managers is to trust their instincts: if they sense an event is extravagant, then it probably is.
Published: 18 Jun 2014
Categories:
  • Compliance, Regulation & Risk
  • The Review
  • Insight
  • Features
  • Analysis
Tags:
  • Regulation
  • integrity and ethics
  • FCA
  • dealing commission
  • Behaviour
  • banking standards

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