Starters, mains and a side order of inducement: why that extra bottle could land you in trouble
Many financial services sector city workers who have been working from home over the last eighteen months are now emerging butterfly-like from their home-office chrysalis and returning to the office. Enthusiasm and appetite for the working lunch have also returned, with socialising around work firmly back on the menu. It is not surprising to read that several restaurants across UK cities had an up to 350 per cent increase in lunch bookings in the last month.
Whilst savouring a hot meal with colleagues or clients (and perhaps a glass, or even a bottle, of wine) is a welcome change from a microwave meal in a spare bedroom, Financial Conduct Authority (FCA)-regulated firms would do well to remind their employees that client hospitality must be business-focused and comply with the FCA’s inducement rules.
The exact rules applicable vary with a firm’s permitted scope of regulated activities, but broadly, the FCA defines an inducement as a benefit (monetary or non-monetary) offered to a firm, or any person acting on its behalf, with a view to that firm or person adopting a particular course of action.
Monetary benefits are easier to identify, while non-monetary benefits sometimes slip through the net without sufficient attention. The FCA has made clear that it expects firms to assess whether all aspects of non-monetary benefits, including ‘extravagant’ lunches, are in fact designed to enhance their quality of service to those clients. Practically, this requires the firm to confirm whether a benefit is designed to facilitate business discussions which often means asking yourself: is this benefit business-focused?
Regulated firms commonly have internal policies designed to track non-monetary benefits. Seeking approval from a line manager, telling the client about the value (to allow them to comply with their own procedures), and making a record are good business practices and assist firms in protecting themselves from the FCA’s long lens of inspection. Returning to the office provides the ideal time to run refresher training reminding employees of internal policies.
Will the FCA be paying even closer attention to inducements and expenses fraud now that city workers are back to business lunching? It has to be said that the regulator has recently been relatively quiet on this front, with the exception of April 2021 when it published a Consultation Paper that proposed changes to the existing inducements rules relating to equity brokerage firms and research costs.
Historically, many equity brokerage firms included research costs as part of transaction commissions so that investment managers buying execution services were paying at the same time for research. A limited range of low-level inducements known as ‘minor non-monetary benefits’ were also allowed as part of an execution service, with the latest consultation proposing a further relaxation of the inducement rules. In practice, this proposed change is very specific and does not suggest any softening of the FCA’s prevailing tone on inducements.
In fact, the critical focus by the FCA on culture, conduct and the notion of individual responsibility remains in the current environment. Individual accountability (the Senior Management and Conduct Regimes are in full effect) is at the forefront of the regulatory mind. Those regimes demand that regulated individuals follow expected standards of conduct, including adherence to rules on inducements and the fundamental expectation of honesty in their dealings. The FCA expects firms to control the financial crime risks at the firm, including by demonstrating effective controls around expense claims and inducement rules.
It is difficult to define exactly how the FCA will implement its focus as we return to the traditional office. Time will tell whether the FCA returns with a hiss and a roar, or if the sheer volume of existing open cases and the inevitable backlog resulting from the heady cocktail of Brexit and Covid-19 means it will sound like more of a whimper. It is certain however that regulated firms must monitor the boom in working lunch arrangements to avoid unwelcome attention from the FCA in the future.
With this in mind, painful as it may be, perhaps it’s best to put down that bottle of 2000 Château Lafite Rothschild and switch to the house red.