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Breaking the link: Experts warn of compliance risks over dual indy/restricted advice model

Advisers frustrated with the constraints of their network’s restricted model are considering becoming dual authorised in order to offer both independent and restricted advice.

Industry sources say some appointed representatives of restricted networks are looking to set up a separate advice firm which is directly authorised and independent. This allows them to remain a member of the network but also offer an independent service to a handful of clients.

But experts say offering such a model involves significant costs and compliance risks, so why are firms considering taking such a dramatic step and how feasible is it to do so?

Network stances

Networks adopted a range of approaches to the independent and restricted advice labels in the run- up to the RDR, with some allowing firms to adopt either model but others forcing members to choose between going restricted and leaving the network.

Perhaps the most controversial was Sesame Bankhall Group’s announcement a year ago that it would switch from an independent to a restricted model for investments and pensions.

In January, the network told members they had six months to move to its restricted option, become directly authorised under its Bankhall brand or leave the firm.

In September, Money Marketing revealed 6 per cent of members chose to leave the network following the announcement, with member numbers falling from 1,133 at the start of the year to 1,070.

Despite the modest drop-off, industry experts say frustrations with the restricted model are growing and advisers are looking for a compromise between the two propositions.

It is also understood wealth management firms including Barclays Wealth have looked at the possibility of setting up a separate independent business.

Tenet Group brands director Mike O’Brien says: “We have experienced requests for this from members but it is not a desirable arrangement. We look at each case individually and would only allow a firm to do it if they met certain conditions.

“Although legally the two firms are separate entities, it can be very confusing for the customer to know who they are dealing with. When a customer first comes to a firm they do not know whether they want independent or restricted advice, so which business do they think the adviser is representing?

“We would want the two businesses to have separate addresses, distinguishable names and separate email addresses. We allow firms to choose if they want to be independent or restricted. But I can understand why some firms are being forced into considering this if they have been told they have to be restricted to remain part of their network.”

Other networks, such as Openwork, deny they are affected by the trend as they have always operated on a restricted model. Sesame declined to comment despite repeated requests from Money Marketing .

Personal Touch says it has no experience of members seeking to set up an independent arm but would consider each case on its merits if approached.

Marketing director David Carrington says: “The issue with dual authorisation is whether it is crystal clear to the client who is advising on what. I would imagine this is difficult to achieve with restricted and independent.

“Our experience has been where mortgage and protection advisers have wanted to go DA with their wealth businesses and this is a much easier scenario to satisfy the client clarity test.”

Liability concerns

Regulatory experts agree the biggest risk in offering a dual model is making it clear to clients who they are dealing with at any given moment.

EY senior adviser Malcolm Kerr says: “There is no reason why an adviser could not do this in terms of regulatory rules but the two businesses would need to be completely separate.

“The firm would need to set up a new limited company and have a separate website, for instance. It needs to be really clear to the client who they are dealing with.”

Experts say advisers would also face a considerable challenge in setting up a DA firm, particularly in terms of capital requirements and obtaining professional indemnity insurance.

PI broker IFA Solutions managing director Jamie Newell says insurers may be wary of the fact that the independent side of the business would have an unusually high risk profile.

He says: “There is a possible conflict in that the network is getting the preferred risk profile, and the independent insurer is more exposed. On the other hand, there would be an attraction for an insurer in the fact that it is a new entity and all the legacy business was covered by the network. Because of the legacy issue, I would be quite confident in getting a competitive quote for a firm.”

But Marsh UK senior vice president Stephen Morton warns that while it would be possible to get PI cover, it may prove to be of little worth as the firm and the network could still be vulnerable to claims.

He says: “Firstly, two pots of insurance are always going to be more expensive than one. There may also be a concentration of risk, because the independent arm will be doing the type of business deemed too risky by the network, and without the network’s checks and balances. Thirdly, the operational risks of running two insurance policies creates a danger a claim will fall through the gap.”

Morton explains that when two businesses are using the same pool of clients, and potentially operating out of the same office, when a claim arises it is very difficult to say which side of the business it originated from. “The danger is it is unclear which insurer to notify, and if you notify both that they will each point to the other insurer,” he says.

“Although you may do everything you can to show the businesses are separate, it is up to the customer who they make a claim against. If you have a small company with limited insurance cover, and a network with large resources, the Financial Ombudsman Service is likely to rule the firm with the deepest pockets gave the advice. It only takes one note from the wrong email address or on the wrong letter headed paper to open the door to complaints.”

FCA scrutiny

Compliance experts say advisers should also carefully examine their motivation for setting up the independent business and expect additional scrutiny from the regulator.

Kerr says: “There would be a concern that a firm which has set up a separate independent business has done so just to recommend products that the network does not want to recommend because they are too risky. You have to ask yourself why you are doing it.”

4 Pump Court barrister Peter Hamilton says the FCA would keep a “close eye” on firms operating such a model and argues they would need to be even more vigilant than most in meeting the independence requirements at all times.

An FCA spokesman says: “This is not straightforward. For those wishing to set up their own directly authorised firm while remaining an appointed representative of another firm there are some practical considerations that need to be taken into account. For example, in these circumstances the appointed representative firm and the directly authorised firm would have to be separate legal entities and it must be clear to consumers which business they are dealing with.

“As with any application, we would look at the arrangements proposed by the firm and make a decision on an individual basis. Advisers considering taking this route should contact us sooner rather than later. The situation is different for employees rather than those with their
own firms.

“It is possible for individuals to operate as an adviser at a directly authorised firm and an adviser at an appointed representative of another directly authorised firm.

“However, it would be up to each firm to manage any potential conflicts of interest.”

Plan Money director Peter Chadborn says firms looking at this should question whether their network is right for them. He says: “An advice firm that is restricted because of its network and wants to set up an independent arm is really saying that the network is not right for them because it is forcing them to offer a proposition they do not want to.”

But many argue firms are being held back from leaving networks that are no longer suitable for them either due to onerous break clauses or lengthy notice periods.

Chadborn says: “If you are going to the trouble of setting up a separate DA business, you may as well go independent for the whole business.

“But for many advisers, leaving the relative safety of a network holds a lot of fears.”

O’Brien adds: “Some networks make it difficult for members to leave and may be why firms are considering setting up a separate business. In cases where the network was independent when a firm joined, and later changed its model to restricted, it seems particularly unfair to make it difficult for firms to leave.”

While a dual model may appear to offer a compromise between independence and restricted – and the freedom of a DA model versus the safety of a network – in reality it seems ARs unhappy with the restricted label may be best off cutting the network apron strings altogether.

Expert view: Dual model creates conflict of interest


There is nothing in the FCA rules to say advisers cannot do this. But the owner needs to make it very clear that the subsidiary firm acts independently and does exactly what the independence rules require: to provide personal recommendations which are based on a comprehensive and fair analysis of the relevant market and are unbiased and unrestricted.

A firm doing this can be sure the FCA will keep a close eye on them so they need to be absolutely rigorous about doing the right thing.

There is a potential conflict of interest in terms of the levels of business between the restricted and independent arms. The danger is that clients of the new independent firm will come from the existing restricted business, and the restricted firm will start to lose volume of business. That may create a problem with the network as some have a minimum level of business requirement.

So there may be a situation where independent advice is the most suitable for the client, but the owner has to keep them in the restricted offering to maintain business levels. That is something that needs to be managed.

I am aware of advisers considering taking this step and that is a result of the impact of the RDR working its way through the market. If a network used to be independent, it will be populated with people who have an IFA mindset, and they are unlikely to enjoy the limitations of its restricted proposition.

Peter Hamilton is a barrister at 4 Pump Court

Adviser views


Luke Fernquest, independent financial adviser, Fernquest Financial Planning

Operating two separate businesses would be confusing for customers. I recently joined 2Plan, an independent network, which seems to me a much simpler option. However, it is not always easy to leave a network so some ARs may feel stuck.

Tim Page, director, Page Russell

Page-Tim-Page Russell-2014-500x320.jpg

The extra fixed costs associated with this model in terms of professional indemnity cover and regulatory fees would outweigh the benefits for most advisers. The network model has been creaking at the seams for some time and firms will have to choose whether they want to stick with a network that is forcing them to be restricted, or find an alternative.

Networks and independence

Openwork: Maintained its restricted stance following the RDR. In 2011 the firm acquired national IFA 2Plan and turned it into an independent network.

Personal Touch: Announced its plans to offer only a restricted model in June 2012. In November 2013, the network revealed new panels for its restricted wealth management proposition, which saw the number of discretionary fund managers cut from 14 to four, and the number of platforms halve from eight to four.

Tenet: The network gave members the choice of whether to operate an independent or restricted proposition. In January 2013, it said 98 per cent of its members had retained the independent label.

Positive Solutions: In March 2013, the firm announced plans to launch a restricted advice arm. In December 2013, Money Marketing revealed the firm was offering its members financial incentives to operate under a restricted advice model, including lower membership fees and a waiver of the £5,000 excess on their professional indemnity insurance.

Sesame: In November 2013 Money Marketing revealed Sesame was to switch from an independent to a restricted model for investments and pensions. In January the network told members they had six months to move to its restricted option, become directly authorised under its Bankhall brand or leave the firm.

Sesame described its new model as “whole of market restricted”, but the FCA later warned against using this label, saying it only recognised the terms independent and restricted.


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There is one comment at the moment, we would love to hear your opinion too.

  1. As a directly authorised IFA I don’t follow the logic I’m afraid. Decide what camp you want to sit in and make it simple for your clients to understand. The industry is so full of confusion already that the consumer is often left feeling better to do nothing (take advice) to their own detriment.

    If I was a client being told by an adviser he/she was an Independent, but also Restricted I’d be thinking WHY and for what good reason would I want the advice to be restricted?


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