FCA fines Sesame over back door commission arrangements
Financial advisers unsure as to the exact meaning of the commission ban, as introduced by the Financial Conduct Authority (FCA) in its Retail Distribution Review (RDR), would do well to read the regulator’s judgement of October 30 2014 against Sesame Ltd.
Sesame, the UK’s largest financial adviser network, has been fined £1,598,000, after it was found that providers could only secure a place on Sesame’s provider panel if they agreed to purchase at least £250,000 per annum of services from other companies in the Sesame group. In other words, Sesame’s choice of which providers made it onto the panel was not solely driven by the interests of their clients. The FCA described the deals as a ‘pay to play arrangement’.
Sesame’s actions were considered to constitute a breach of FCA Principle 8: “A firm must manage conflicts of interest fairly”, as well as a breach of the specific rule in COBS 2.3.1, which says that payments received, other than standard fees or commissions, must be disclosed to clients and must not affect the firm’s ability to act in the best interests of clients.
The FCA pointed out that in 2004, its predecessor, the Financial Services Authority (FSA), issued a ‘Dear CEO’ letter to firms, in which it highlighted that the receipt of payments should not be a condition for inclusion on a provider panel. In June 2012, the FSA’s RDR newsletter warned firms not to solicit payments in order to secure distribution arrangements. The FCA than issued finalised guidance on the issue in January 2014 which stated unambiguously:
“where an advisory firm operates a panel of providers, the inclusion of providers on the panel should not be influenced by the provider’s willingness and ability to purchase significant services from, or provide other benefits to, the advisory firm”
Tracey McDermott, director of enforcement and financial crime at the FCA, 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.”
Sesame chairman John Cowan commented:
“We recognise that the arrival of the RDR introduced a step change in regulation and heralded a new relationship between product providers and distributors. As the market leader, we should have been more responsive to the wind of change blowing through our industry.”
However, it is unclear just how many of these agreements will need to remain in force, at least until 2016, on the grounds that they are legally binding contracts.
This is the fourth occasion on which Sesame has been fined by the FCA or FSA. In 2004, it was fined £290,000 for failing to satisfactorily monitor the activities of an appointed representative; in 2007, the penalty was £330,000 for complaints handling issues relating to structured capital at risk products; and in 2013 it was fined £6.2 million for failing to ensure the suitability of advice to invest in Keydata products and other investment products. The fine for this latest misdemeanour was increased as a result of their previous disciplinary record.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.