The UK regulator plans to crack down on fund companies that splash out on lavish events and gifts for financial advisers in an attempt to win business.
Yesterday the Financial Conduct Authority said it had discovered cases of fund providers offering hospitality or gifts to advisers that were of “unreasonable value”.
“[This] could have led to a channelling of business to that provider,” the UK watchdog said.
Gina Miller, founding partner of SCM Private, the UK investment house, said such practises are widespread and penalise smaller groups that either cannot afford or would not choose to offer the same perks.
She said: “It is all very well to cement or reward a relationship, but the extravagance of some entertainment is eye-watering. You have to question whether it influences what an adviser offers clients.”
It is not uncommon for big fund companies to invite advisers to events such as the Monaco Grand Prix, three day golfing tournaments in Scotland or cruises on superyachts, according to Ms Miller.
And this is by no means a UK phenomenon; Italian fund house Pioneer Investments, for example, invited French clients to the Champions League football final in London last June.
French group Carmignac Gestion also paid for a large number of UK financial advisers to attend a private Rolling Stones concert in Paris in late 2012.
There is broad agreement among smaller fund providers that they are losing business as a result.
The head of an independent financial adviser network recently told Ms Miller that although SCM Private’s funds rank highly in terms of performance, her fund company “does not wine and dine advisers enough to retain [the IFA network’s] business”.
“[Fund selection] is not about best advice, it is about best entertainment,” she said.
Hector McNeil, co-chief executive of Boost ETP, the exchange traded fund boutique, shares her concerns. He said: “[Corporate entertainment] is a bit like product kickbacks and lacks transparency. I think it is only a matter of time before it is banned or prohibited.”
However, Jason Hollands, a managing director at BestInvest, one of the UK’s largest adviser networks, believes such fears are overblown. “I have not been invited to any sports events, concerts or trips in the past year,” he said.
In response, Carmignac says that it only hosts one entertainment evening a year out of roughly 200 investment-focused client events. Pioneer says it allocates a modest part of its marketing budget to corporate hospitality and plans to reduce this expenditure soon.
There is growing consensus that rules on what constitutes appropriate corporate entertainment need to be clarified, particularly beyond the UK market.
Christopher Cruden, a fund manager at Insch Capital, a Swiss hedge fund, said: “Where does hospitality cease and bribery begin?”
Gary Mairs, co-founder of UK fund house TCF, added: “There is a fine line between what is over the top and what is acceptable. We think rugby matches or the Grand Prix are unnecessary and are potentially open to people making accusations of abuse.”
Until now, uncertainty around the rules has caused some fund groups to scale down events to include only their most senior clients, or to legitimise them by tacking a business meeting on to it, according to Charlie Hepburn, managing director of Vivid Event Group, the corporate hospitality company.
His company has also seen increased demand for bespoke gatherings between senior fund executives, top clients and their spouses, such as trips to see the northern lights, as opposed to large-scale client events.
Mr Hepburn believes that fund managers are unlikely to turn away from corporate entertainment altogether as a means of maintaining relationships with advisers, despite the regulator’s push against this.
He said: “The [fund] industry is oiled by entertaining, and there is a massive grey area in terms of what you can do. People are still entertaining, but they are just finding new ways to do it.”