Margin for error
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Regulatory Legal partner Gareth Fatchett says the network model is a busted flush.
Who would be a network member? No other market has evolved with such an unusual structure.
The network idea in the most basic of forms is a great idea. Collective buying and collective negotiation. It smacks very much of a quasi-financial services trade union. However, the purity of the model has long since been forgotten. All networks are bottom-line-driven models.
The problem with such a model is that it works on very thin margins. It also works to the lowest common denominator in terms of adviser quality and competence.
The reality is that the model is a busted flush. It does not work as the network owners seemingly cut corners to drive the maximum they can out of their thin margin. Without sales, they are sunk. Without new products and new ideas, they have nothing to keep their members out selling.
Alpha 2 Omega is a network of which I have significant knowledge due to the fact that my firm acts for a decent number of their appointed representatives.
The network suffered from selling a number of product types (geared Teps/Arch Cru) which later came back to bite.
The FSA imposed requirements on the network and followed a couple of weeks later with a cancellation of permissions.
Where does this leave the adviser? Are they culpable? What do they stand to lose?
First, the agencies of a network are all held in the name of the network. Technically, the network owns the client data and the agencies.
This does not square with the fact that the customers who hold a relationship with the appointed representative do not know the network.
The reality is that network members could have their agencies sold from under them. The Alpha 2 Omega network is being offered for sale by the administrators. I have reviewed the sales pack and it assumes that the member and his/her business is part of the sale. This cannot be right.
Any buyer would be facing an implosion as the assets would start to melt away within a couple of months after the sale. It concerns me that the FSA would permit such a sale when all it will do is involve clients being disadvantaged, a greater call on the FSCS and a huge amount of clawbacks as network business is rewritten.
My conclusion is that no one wins. The adviser has a genuine sense of shock that those running the bust network are trying to sell “their” assets.
If the FSA wants to be considered a proactive regulator, it really should sort this out.
Gareth Fatchett is a partner at Regulatory Legal
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Readers' comments (2)
George Emsden | 6 Feb 2010 5:22 pm
have never had much interest in networks but this seems to be a lose-lose situation. The network can sell your client bank BUT the adviser is still ultimately responsible for the advice given?
www.georgeemsden.co.uk
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Gary Watts, Which Network | 8 Feb 2010 4:14 pm
When I first skimmed through this article I was so sure it was a wind up that I checked the calendar twice to make sure it wasn't April the 4th.
How can anyone say the "network model" is a busted flush when many networks are still up there doing great work in helping their AR's develop their businesses and keeping them on the right side of regulation, and the FSA are openly encouraging brokers to become part of larger organisations to save them policing costs and help to ensure overall levels of compliance?
To say networks are profit driven as averse to "quasi-financial services trade unions" is hardly intuitive and just puts them in line with almost every other commercial organisation operating in the world today.
To say they work to "the lowest common denominator in terms of adviser quality and competence" is a massive insult to all of the good hardworking financial advisers we come across who have been working as AR’s for years and are quite happy thank you. I feel a real sense of indignation that financial networks should be thrown into the same dustbin as Solicitors, Banks and MP's.
The fact is that it's a tough time for most people in financial services, and particularly for Mortgage Brokers, however I think that the worlds banks and governments have significantly more to do with that than financial networks.
It's equally true that many small brokerages would be out of business by now if they did not have a network behind them to lower their operating costs, maintain compliance standards and spread the cost of being in business over the year.
Where the article does swerve violently from a rant into perfect sense however is when it states that buying a defunct network can be folly. In the real world, the clients belong to the advisers, not the network and the AR's far from being an “asset” are free individuals who can go wherever they like.
A network in trouble who does not pay AR's commission fees has in most cases effectively repudiated the contract they have with an AR who accepting that repudiation can go where they like.
It’s a fact that there are good networks, bad networks and some networks that I wouldn’t trust to hold a tea party, but with that statement you could replace the word network with almost any organisation, council, football club, school, regulator and it still rings true.
It's almost always messy for all involved when a company breaks up whether the casualties are builders who won't be paid for a job, suppliers who have to take a hit on goods they have supplied or AR's with pipeline income, but please let's not blame a whole industry for the failings of some of the companies in it or the fact that an administrator might not really grasp the network model.
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