Compliance Gifts and Inducements
13th September 2023
Article by Meg Shona Halpin-Webster, Graduate eLearning Content Writer at Marshall Elearning Consultancy, a Ciphr company
Almost every year since 2016 the FCA has issued fines to firms that have breached conflicts of interest regulations, and in 2022, one firm alone was fined over nine million pounds. This demonstrates that perhaps firms are not as clued up on compliance with conflicts of interest as they should be.
Gifts and inducements are just one subset of conflicts of interest, but it is vital that firms manage them to avoid causing detriment to a number of stakeholders, including customers, staff, and the firm itself.
As part of our launch of 20 new FCA Compliance elearning courses, Marshalls are committed to providing firms and employees in the regulated financial sector with the necessary knowledge and in-depth understanding of how to meet FCA compliance requirements, and why it’s important to do so. Here we explore gifts and inducements and inform both firms and employees on how they can navigate their management of this subject.
Why are gifts and inducements a conflict of interest?
Gifts and inducements are a conflict of interest as they are external to the standard commission or fee for a service. Gifts and inducements can take the form of goods, monies and other services and can result in the influence or favouritism of a specific client, action and even non-action in some cases.
The FCA’s financial regulators pay close attention to conflicts of interest of any kind, with gifts and inducements being just one subset. As conflicts of interest of any kind are a top priority, firms and employees need to be clear on what constitutes a gift or inducement and must be able to identify them. Recognising a gift or inducement is the first step a firm must take to be able to manage them. Here are a few examples:
- Cash or cash equivalents
- Additional commissions or fees on top of the standard commission or fee for a service
- Goods – for example, a vehicle; a concert ticket; a technology device
- Hospitality – for example, a luxury trip; a first class plane ticket
- Training programmes
What are the regulations in place around gifts and inducements?
There are various legislation and FCA regulations in place around gifts and inducements, including:
The Companies Act 2006:
The Companies Act of 2006 is the main piece of legislation in place that governs company law, and it is applicable to all UK incorporated firms. To be more specific, Section 175 of this act concerns a company’s duty to avoid conflicts of interest, including gifts and inducements.
Bribery Act 2010:
2010’s Bribery Act states that it is a criminal offense for UK citizens or residents to receive or give a gift or inducement either directly or indirectly. This is relevant to gifts and inducements both in the UK and abroad. By accepting a gift or inducement for doing, or by not doing, a particular action, or instead showing favour, or disfavour to someone, you will be breaking the law.
FCA’s Business Principles:
The FCA Handbook details 12 business principles that firms must obey and adhere to. Principle 8 concerns conflicts of interest, which relate most closely to gifts and inducements. It states:
‘A firm must manage conflicts of interests fairly, both between itself and its customers and between a customer and another client.’
You can view the rest of the FCA’s principles for business here.
Why is it important to manage gifts and inducements?
It’s vitally important for firms to manage gifts and inducements as they can have a significant impact, not only on the firm itself, but also parent companies; group entities; third-party suppliers; trading counterparts; staff; previous, current and potential customers. It is more than simply best practice, as managing gifts and inducements is a necessity to ensure that any and all business is being conducted with both honesty and integrity. Managing any gifts and inducements appropriately works to improve the relationship between the firm and its customers whilst also reducing the likelihood of regulatory action.
So, how can firms effectively manage gifts and inducements?
Our useful guide offers valuable insight into proactive steps that firms can take to improve their management of gifts and inducements:
1. Implement a gifts and inducements policy
All firms must implement a robust gifts and inducements policy. This policy should clearly define what gifts and inducements are, providing specific examples if necessary to cement understanding. The policy should identify the circumstances which constitute the acceptance or offering of a gift and inducement, whilst also identifying circumstances that may give rise to a conflict of interest that may entail the risk or damage to a client’s interest. For a gifts and inducements policy to be vigorous, it must specify the procedures to follow and the key measures to adopt to successfully manage conflicts of this nature.
2. Utilise a gifts and inducements register
A gifts and inducements register is essential to effectively documenting the details of each gift or inducement received. Compliance should liaise with the business to ensure that all controls in place are sufficiently robust and that the register is sufficiently detailed and kept up to date to ensure that there are no gifts or inducements being overlooked.
3. Adopt the ‘three lines of defence’ model
Firms should consider adopting the ‘three lines of defence’ model to manage the potential risks that can arise from a gift or inducement. This model involves the compliance department regularly reviewing the policies and procedures that are in place on an annual basis, at least – it is recommended that the policies and procedures are reviewed on a more regular basis to properly ascertain employee understanding of those in place. The second line of defence requires reviewing the minutes of relevant committee meetings and regularly spot-checking the register for any breaches. The third and final line of defence is for internal audit functions to complete a rigorous audit of the work carried out by compliance.
How can employees comply with policies regarding gifts and inducements?
Managing the risks of gifts and inducements is a responsibility that also concerns employees. It is their responsibility to remain compliant with the policies and procedures in place. Employees can contribute by identifying and managing gifts and inducements using the provided systems and controls that their firm has in place. The policies and procedures in place relating to gifts and inducements are applicable to all staff members, including part-time staff, contractors and non-executives, and any non-compliance can lead to regulatory action.
How Marshalls can help you prevent conflicts of interest
Here at Marshalls, we want to support FCA-regulated banks, insurers and other financial service providers by ensuring FCA compliance with our extensive range of FCA compliance e-learning courses. Each of these relevant, informative and accessible courses have been developed in partnership with Victoria Sena, founder of Cherrybank Consulting and a recognisable expert in regulation, compliance, governance and risk management.
On the topic of gifts and inducements, we can offer a Gifts and Inducements elearning course, which empowers learners with real-life case studies to further their understanding of the regulations in place for gifts and inducements. Available both off-the-shelf and as a bespoke, customised e-learning course, tailored to your firm or institution, our gifts and inducements training is hugely advantageous. To find out more about this specific course, or more about our wider set of FCA Compliance courses and how you can use them, get in touch.