The Financial Conduct Authority (FCA) has fined Sesame Ltd, the UK’s largest network of financial advisers, £1,598,000 by for setting up a pay-to-play scheme.
It is the fourth time the firm has been fined by the regulator.
The FCA said 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 the Retail Distribution Review (RDR was 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% 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.
John Cowan, Sesame Bankhall Group (SBG) executive chairman, said: “We recognise that the arrival of the FCA’s Retail Distribution Review (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.
“In January 2014 the leadership was changed and the new executive team has been implementing a new and more transparent policy, as well as building a robust operation that will serve customers better in the future. This has led to significant improvements in our processes and controls, with customers’ best interests and quality outcomes placed firmly at the centre of all business decisions.”
Sesame operates two restricted advice propositions for its Appointed Representatives (ARs) in the Network. Today’s announcement relates to the construction of panels within Sesame’s ‘Focused’ restricted advice proposition, which was launched in July 2012. In July 2013, Sesame engaged an independent third party to undertake a review of the services that were offered by the Sesame Group. Following that review, Sesame voluntarily withdrew some of the services which were offered to providers.
