1. 1 October 2012
To the CEOs of a sample of life insurers and networks /
IFAs (the sample essentially comprises the largest
providers of retail investment products and the largest
distributors)
Inducements rules and the Retail Distribution Review (‘RDR’) adviser charging
rules
One of the central aims of the RDR is to address the potential for adviser remuneration to distort
consumer outcomes. Our adviser charging rules ensure that advisory firms are only remunerated by
adviser charges for the advice and related services they provide in connection with retail investment
products, these charges being agreed with, and paid for, by their clients.
We are concerned that some firms may be looking for ways to circumvent the adviser charging
rules by soliciting or providing payments that do not look like traditional commission, but are
generally intended to achieve the same outcome, i.e. to secure distribution and have the same ability
to unduly influence advice. Clearly such arrangements are not in the spirit of the RDR.
We are concerned that non-commission payments and benefits (typically included within
“distribution agreements” between provider and distributor firms) may be indicative of firms
seeking alternative ways of preserving features of the market that the RDR intends to eradicate. We
have previously said on a number of occasions that during the transition to the RDR implementation
date we would supervise for signs of firms seeking to do this.
Therefore, we are now writing to the CEOs of a number of life insurers and network / IFA firms
that are subject to the requirements of the current COBS 2.3 inducements rules and the prospective
adviser charging rules in COBS 6.1A (for all firms providing advice to retail clients) and COBS
6.1B (for providers / platforms), setting out our key concerns about some aspects of distribution
agreements we have seen in the market, and requesting confirmation that any such agreements in
place, or being negotiated, are compliant with those rules.
We are also requesting information from you as set out at the end of this letter - in Annexes 1 and 2.
We set out below examples of inducements (some of which we have seen) that concern us:
1. Cost contribution from a provider for distributor training / conferences / seminars etc: we
consider that a provider organising, subsidising or paying for distributor training, conferences
or seminars (involving costly social and entertainment events unrelated to the training) may

2. be a prohibited inducement. This is because it has the potential to impair compliance with the
distributor’s duty to act in the best interests of the client, and may not enhance the quality of
service to the client (a new requirement for insurance from 31 December 2012). 1
2. Payments to a distributor for assisting in the promotion of the provider’s retail
investment products: we consider that any such payments should generally reflect the
costs incurred by the distributor in the promotion, otherwise the payment may impair
the firm’s ability to pay due regard to the interest of its clients. The distributor’s
assistance in promoting the provider’s products must, from 31 December 2012, also
result in the enhancement of the quality of its service to clients.
3. Payments to a distributor for the development of software necessary to operate
software supplied by the provider: we have seen payments from providers to
distributors for the costs incurred by distributors to update and enhance IT hardware and
software as part of an overall development of an integrated provider / distributor IT
solution. Where the costs incurred by the distributor go beyond those which are
necessary to operate software supplied by the provider, that part of the costs may impair
compliance with the inducement rules. Such costs would include those that can be
attributed to the wider business benefit of the distributor. The guidance in paragraph 10
of COBS 2.3.15G on reasonable non-monetary benefits provides that the cash
amounts/other assistance for the development of IT should generate equivalent cost
savings to the provider or its clients.
We set out below our main areas of concern about the way some firms are interpreting the
inducements and adviser charging rules.
COBS 2.3 inducements rules
We have three main areas of concern:
1. We consider that an agreement may impair compliance with the duty for a firm to act in
the best interests of the client if payments made by a provider to a distributor represent a
key source of revenue for the distributor (see new COBS 2.3.16AG which makes clear
that firms ‘should be aware that acceptance of benefits on which the firm will have to rely
for a period of time is more likely to impair compliance with the client’s best interests
rule’); in such circumstances these payments may cause a distributor to put its commercial
interests ahead of the best interests of its customers.
2. As you will be aware, from 31 December 2012, the scope of COBS 2.3.1R(2)(c) has been
widened to include insurance and so payments/benefits will also need to satisfy the
additional requirement that they “enhance the quality of service provided to the client”. In
some of the agreements we have seen we do not see how the payments/benefits are
designed to enhance the quality of service to the client; in such circumstances the
payments would be prohibited under our rules.
3. Inadequate disclosure of permitted inducements. The disclosure wording firms propose to
use to meet the disclosure requirements of COBS 2.3.1R and COBS 2.3.2R must contain
sufficient information to enable the client to understand the existence, nature and amount
of the payment so that an informed decision can be made.
1
See also Example XI of the CESR recommendations on ‘Inducements under MiFID’ (issued by CESR May 2007) (in relation to
training) and Example XII in relation to providers providing general office equipment.

3. Prospective adviser charging rules
While the RDR allows firms to continue to pay and receive benefits which comply with the
inducement rules, the fact that a firm considers that a payment or benefit meets the
inducement rules does not mean that it will be permitted under the new adviser charging rules
in COBS 6.1A and COBS 6.1B. 2
Furthermore, we have two general concerns:
1. We have seen some distribution agreements with lengthy terms (such as five years)
under which sizeable upfront benefits (such as contributions towards distributors’ IT
systems) are being made to the distributor in advance of 31 December 2012. However,
where all or most of the benefits are going to be used by the distributor after 31
December 2012, we consider that a portion of the upfront benefits may, depending on
the circumstances, need to be treated as if it was made after 31 December 2012 and so
be caught by the adviser charging rules.
2. We intend there to be a level playing field between advisers and want to ensure there is
no unfair subsidy by providers of individual distributors’ costs. The scale of the
payments we have seen under some distribution agreements are such that we are
concerned that these payments may in effect be subsidising a distributor’s general costs,
which in turn may subsidise the adviser charges levied by the distributor. In our view,
this creates a distortion in the market by potentially giving some distributors an unfair
competitive advantage over other firms which do not receive such payments or non-
monetary benefits. Such an outcome was clearly not the policy intent of the RDR and
the desired outcome under the prospective adviser charging rules.
Request for information
Please confirm that any agreements you have in place, or are negotiating, are compliant with
the current inducements rules and, if the agreement continues after 31 December 2012, will be
compliant with the prospective adviser charging rules.
Please provide us with the information requested in Annex 1 to this letter and complete the
Excel spreadsheet in Annex 2 summarising the amounts payable under each of the agreements
identified in Annex 1. If the agreement replaces an existing or previous agreement with the
same third party firm please also complete Annex 2 for the existing or previous agreement.
2
Firms should consider the new guidance provision in the inducement rules in COBS 2.3.6AG which states: ‘COBS 6.1A
(Adviser charging and remuneration), COBS 6.1B (Retail investment product provider requirements relating to adviser
charging and remuneration)… set out specific requirements as to when it is acceptable for a firm to pay or receive
commissions, fees or other benefits: (1) relating to the provision of a personal recommendation on retail investment
products…’;

4. We may contact you for further information and clarification of certain matters during our
review, and following completion of our review we shall write to you with our findings and
conclusions and any actions we require you to take.
I look forward to receiving your response to this letter and the information requested by 15
October. In the meantime I would be grateful if you could confirm receipt of this letter by
emailing the Life Insurance Themes team at the email address above.
Yours sincerely,
Nick Poyntz-Wright
Head of Department, Life Insurance
Conduct Business Unit
Annexes 1 and 2 are not attached to this letter