The content of the MiFID II Delegated Acts has left the industry in no doubt that the days are numbered for inducements.

The rules surrounding inducements within the Delegated Acts are tight and make it clear that they can only be accepted if there is a clear, demonstrable effect on the service the customer receives and must not benefit the firm over the client’s needs.  However, the FCA has signalled an alternative view on whether inducements should remain a feature of the industry as the regulator is concerned that the restrictions within MiFID II may not be enough to combat the risk of distorted consumer outcomes.

As part of its objective to secure appropriate levels of consumer protection, the risk that advisers may be incentivised to select funds that pay commission over those that don’t is unacceptable.

As a result, the FCA has already proposed to remove all commission payments and other forms of inducements for discretionary investment managers, following its thematic work which highlighted that some firms were still accepting inducements which didn’t directly benefit the client.

It is likely to pursue this approach in order to bring its approach in line with the inducements rules within other financial sectors, including retail financial services which saw commission banned under the Retail Distribution Review (RDR) rules.

Over the coming year, the FCA will confirm its approach to implementing MiFID II ahead of the legislation coming into force in January 2018.

While the exact details are yet to be announced, firms should look to ensuring their current policies and processes around conflicts of interest and inducements are compliant with current legislation as regulatory attention in this area is likely to increase.

A gap analysis is a valuable tool in identifying the necessary changes required to bring firms’ systems and policies in line with MiFID II expectations when the directive comes into force.

One of the challenges firms will face is appropriately identifying permitted and inappropriate inducements.

The FCA’s thematic work highlighted situations where permitted benefits were being offered alongside those which were not permitted, such as

• conferences or training sessions paired with evening dinners.

It’s not enough to have one compliant component within a package of measures, all parts must meet the requirements and be assessed individually.

Firms with robust systems, which are monitored by teams with appropriate levels of training and knowledge will be better placed to identify benefits which do not conform to the rules around inducements, and therefore avoid regulatory censure.

Firms are also expected to maintain detailed records of all inducements accepted, including who received the benefit, how it directly benefits clients and the total value received.

This is important, not only to evidence compliance, but also to provide clients with transparent information on the value of the benefits they receive.

Both the FCA and ESMA are concerned with ensuring that firms are delivering services that meet the clients’ best interests, so if inducements have been accepted that don’t have a demonstrable effect on the service received then it will be deemed to be non-compliant.

Whether the FCA does opt to enforce a complete ban on inducements or not, this issue is likely to remain on the regulatory radar and receive considerable attention over the next few years.

It is advisable for firms to begin the process of reviewing their inducement policies and controls now, in order to ensure they are meeting current regulatory expectations and are adequately prepared for any future changes.

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