05Nov

Fines Handed Out Over Back Door Commission

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.

13Aug

FCA fines insurer over sales practices

In August 2014, financial regulator the Financial Conduct Authority (FCA) fined Stonebridge International Insurance Limited, a subsidiary of Aegon, £8,373,600 over its failings when selling personal accident, accidental death and accidental cash plan insurance.
The fine concerns telephone sales made to customers in Germany, France, Italy and Spain, as well as in the UK.

In addition to the fine, Stonebridge faces the prospect of paying significant sums in compensation to affected customers. £400,000 in redress has already been paid, and it is estimated that almost 500,000 customers could be due a redress payment.

When selling the policies, outsourcing companies used by Stonebridge encouraged customers who were wavering over whether to purchase to buy the plan anyway and make use of the cancellation period if desired. However, when customers tried to cancel, they were then actively discouraged from doing so, and staff were financially rewarded for preventing cancellations. Some customers who wished to cancel were persuaded to take reduced cover instead, but here they were not given sufficient information about the revised policy terms.

Although the policies were being sold by outsourcing companies, they did so using a sales script designed by Stonebridge. These scripts were designed to direct customers towards costlier and more comprehensive forms of insurance, whether the customers needed this or not.

When selling the cover, the outsourcing companies failed to state that they were acting on behalf of Stonebridge at the start of the call, did not properly explain the extent of the limitations and exclusions on the plan (or on occasions gave incorrect or misleading information about exclusions) and conducted the calls too quickly to allow customers to digest information. Many customers were not informed of extra charges they would incur as a result of their chosen payment method.

Reviews by Stonebridge of sales made by the outsourcing companies were limited, and reference is made in the FCA’s Final Notice to the compliance department being ‘under-resourced’. All Stonebridge’s compliance monitoring activity took place remotely in the UK, with no visits being made to the European offices, and there was no monitoring of any kind of the German and Italian activities between April 2011 and December 2012.

Although each European outsourcing operation did carry out their own internal monitoring, this was often of poor quality. One example is that quality assurance of sales calls in France consisted simply of listening to the first five minutes of each call, rather than the entire conversation.

No management information regarding the sales was reviewed by Stonebridge, and on one occasion Stonebridge failed to identify that an outsourcing company had amended a previously approved script.

The FCA noted that Stonebridge purposely targeted lower income customers and those without degrees and professional qualifications, meaning that their financial knowledge may have been lower than that of the average customer.

Tracey McDermott, FCA director of enforcement and financial crime said of the firm’s actions:

“Customers are entitled to expect firms to provide them with fair and balanced information to enable them to make the right choices about the product that is right for them. Stonebridge failed to do this.”

Stonebridge has now ceased selling the products covered by this action. The firm is also said to have put in place new arrangements for monitoring its outsourcing companies, and according to the Final Notice, has “comprehensively revised its governance structure.”