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Comply with me

In the next year, all brokers will need to make key decisions about how to face up to the demands of regulation in 2004.

Any sensible intermediary will give him or herself at least six months to bed down new systems and practices before regulation makes them compulsory. Decisions will need to be made this side of the summer break so that changes can be made in the autumn and new procedures adopted during the winter and spring.

The key issue for brokers will be whether to become directly regulated by the FSA, join a network or use a compliance service provider.

Come the autumn of 2004, everyone will operate within a regulated market and will need to ensure they can meet all the compliance requirements.

Let me start by dispelling a few myths. The first is that the FSA does not want brokers to become directly regulated. This is not true. Brokers can become directly regulated and many have already done so. It remains unclear precisely how keen the FSA will be to keep an eagle eye on thousands of financial advisers rather than a far smaller number of networks but, for the moment, direct regulation is an option open to all.

The most immediate issues relating to direct regulation are arranging adequate PI cover and putting in place suitable compliance procedures. PI is a hot topic at the moment but the myth that it is impossible to arrange is not true. Brokers should be able to arrange cover during 2003 as more capacity becomes available in the market at the beginning of the year and I would be surprised if many brokers find themselves in a situation where they simply cannot buy cover.

The third myth I would like to dispel is that the easiest option, as far as compliance is concerned, is to do it yourself. In my opinion, compliance is a full-time job and not one that can be sorted out during your lunch break or after work. CP146 is a highly detailed document and keeping up to speed with all the rule changes and ensuring procedures and documentation are kept in good order is not a task for the faint-hearted. Also bear in mind that CP146 is but one of many documents to be absorbed and implemented.

A better solution is to use a compliance service provider. There are a couple of factors to bear in mind, the first being flexibility. Using a service provider is like buying off-the-shelf computer software rather than having a program written to meet your needs. It is fine as long as you want to do precisely what it says on the package – if you want anything different, you may have a problem.

The second issue is cost. The charges may look attractive compared with a network but do not forget you are buying a specific service and nothing else. You get no product support, marketing help or any other services that networks give their members. You should compare costs, not just against networks but also with employing an in-house compliance officer. On this basis, compliance service providers represent good value for money.

The third option is to join a network. Networks come in two main varieties – IFA networks such as Misys and Virtual Net and the unregulated networks, including mortgage and general insurance networks.

IFA networks have been around for several years, so most people are familiar with the concept of what they have to offer. Essentially, it is an all-in service including compliance, training, PI cover, product sourcing and marketing support. Fees are charged in a number of different ways but the traditional way is a percentage of commission.

But networks vary greatly in the quality of service they provide. Problems include poor compliance support, inflexible charging structures, faulty administration and inadequate marketing support. Networks are starting to acknowledge these problems and have chosen different ways to overcome them. Misys recently announced its solution, which is to move its compliance centre to India. It has signed a five-year £6m deal which it believes will help raise standards, remove the paper trail and speed up commission payments.

Virtual Net also believes in the virtues of technology. At the heart of our service is a new compliance engine which guarantees 100 per cent compliance checking of all new business. This is in stark contrast to traditional networks, which typically check only 10 per cent of new business.

Some disgruntled members have sworn never to join a network again but this is a harsh reaction to a service which, if administered properly, brings real benefits. A good quality network is not so much a manager as a mentor helping you find your way through the regulatory jungle.

Non-regulated networks are far simpler affairs. Mortgage and general insurance networks often make no direct charge to members for their service as they are remunerated by product providers on a commission basis. Their real benefit has been in terms of product sourcing and they have been an aid to new business and application processing rather than providing compliance, training and regulatory support.

It will be interesting to see how these types of networks try to provide their members with compliance support following the introduction of regulation. Some may simply continue as product marketing facilities but it is difficult to see how they will survive in an era when sourcing systems are widely used and technology is permitting direct submission of business to product providers and online case tracking.

There is nothing to stop an adviser operating in a currently non-regulated market from joining a regulated network. Networks would have to adjust their pricing structures to reflect the fact that they would not require all the services on offer.

The compliance choices on offer are varied and it will pay you to give them serious consideration during early 2003 so you can start putting plans in place. This is not an issue to be left to the last moment. If you do, I guarantee you will regret it.


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