Sesame’s £1.6m penalty for setting up “pay to play” distribution deals with providers lays bare the arrangements designed to work around the RDR. The FCA has claimed a high profile scalp in taking action against the UK’s biggest adviser network. But in the days that have followed, the conversation has turned to what other distribution deals are in place between providers and advice firms, and to what extent these failings go beyond Sesame.
Experts suggest the FCA fine shows the Wild West days of upfront payments from providers to advice firms in exchange for distribution are behind us. But there are still questions about the post-RDR advice models that are emerging, and the new ways providers are looking to secure distribution.
The fine – and the defence
Between 1 January 2012 and 31 January 2014, Sesame told providers to spend an extra £250,000 a year on services such as marketing, conferences and product data to gain a place on the network’s restricted advice panel. One provider was told to increase its budget for services to £750,000 a year for the next two years.
Sesame told providers it anticipated entering into long-term deals with them of at least five years.
Speaking to Money Marketing , executive chairman John Cowan said “everybody in the industry was aware” of the deals being done between providers and advice firms, and questioned whether Sesame was “the only company that has operated in some sort of different way to the rest of the marketplace?”
Clearly, whether the practice was widespread or not does not take away from Sesame’s own failings. But it is worth examining the scale of these deals in the run-up to the RDR and what happens next for distributors relying on these arrangements.
Last year, EY estimated the advice sector was in receipt of over £30m in payments from providers. EY senior adviser Malcolm Kerr says: “For some networks these payments were very significant, while other networks were not large enough or were not inclined to negotiate these arrangements with providers. The absence of these payments is another challenge for networks.
“My guess would be that total payments agreed were in excess of £30m, and now that figure is less than £5m, which is a significant reduction.”
Cazalet Consulting chief executive Ned Cazalet says: “Nobody denies that all of these non-commission, marketing support, inducements payments, call them what you will, were a fundamental part of the provider and distributor relationship over many, many years. That side of things was a massively important component of distributors’ revenue.”
The FCA final notice states that Sesame generated a total of £16.3m over two years as a result of its distribution deals. Cazalet argues that without this kind of money coming in to prop up the distributors, the network model is looking increasingly fragile.
“A big part of the networks’ revenue has always been these ‘under the table’ marketing allowances. Everyone knew that was on the way out. The reason why Sesame continued in this vein was because it needed the money. You have to question if Sesame’s model of survival was the £16m it was getting, with that taken away, where does that leave an enterprise which was not in the best of health to start with?”
He adds: “These old-style networks and nationals could not make money even in the years of plenty. In the new world, there remains a big question mark over the structures to support advisers. This is a fundamental issue.”
What the distributors say
If the extent of the deals as outlined above is correct, distributors are unwilling to come forward and admit it. But they are keen to stress that others have been up to no good.
Sources have told Money Marketing that although upfront payments for access to retail distribution may be on the way out, when it comes to panels for protection or platforms for example, or approved fund lists, there are still deals being done.
Tenet Group brands director Mike O’Brien says there is strict governance over the way its panels are constructed. He says: “The decision process depends on the product, the fund and the provider, but by and large we are looking for financial strength, counterparty risk, features and benefits, charging and pricing structures and track records.”
O’Brien says providers do pay a “contribution” towards training, which is disclosed, but says product pushes are not permitted. Marketing materials have to be agreed at a “market rate”.
He adds: “If you stand back and look at what those payments are for, it is to enable advisers to be better placed to provide advice to the end consumer. If you go the alternative route, where providers simply set up their own events, it will purely be a product push. So what is the better of the two options?”
Money Marketing revealed in April 2013 that Openwork was in line to receive £15m from Partnership under the terms of a single-tie annuity deal. There has been no enforcement action against Openwork, and the FCA discontinued its investigation into Partnership last month.
Openwork propositions and marketing director Philip Martin says: “The FCA’s direction of travel is very clear. Openwork never ran conferences where the entire cost was paid by providers. It was always a small proportion of the cost. It is directly related to the cost of exhibiting, there is no profit or marketing support that comes back to Openwork.”
SimplyBiz, Intrinsic and Lighthouse declined to comment.
End of an era?
Sesame is still using the providers that signed up to its restricted advice panel, though this is being reviewed. Cowan has said even without the payments, the panel would have looked “very similar”.
The FCA has been careful to point out “a number of providers” on the panel made payments to Sesame, implying that not all of them did so. There are questions around whether providers are as complicit as Sesame for making the payments, but removing providers now would suggest they were only on the panel due to the amounts paid.
Cazalet says: “The debate now is around who is providing services to clients, so the lines are being redrawn more around products on platforms. With long-term business based around platforms rather than networks, the world is moving on. These are the last embers of an old-school era.”
Kerr says there is no benefit now for networks to have very narrow panels. He says: “I suspect the FCA has no problem in a network using its buying power to get better deals for clients but the days of generating additional revenue through investment products are completely gone.”
Distribution is changing in other ways too, with fund groups buying up distribution channels wholesale. Upfront payments may be a relic of the past, but post-RDR providers will continue to look to shape distribution in whatever way they can.
The Sesame fine shows a regulator prepared to bear some teeth at last following years of repeated written warnings about marketing packages. But it does leave further questions unanswered.
Firstly, a £1.6m fine for £16m revenue seems like good business. Does the amount reflect the size of the crime or the financial position of the fined?
Secondly, other industry deals have eclipsed the £16m quoted in just one single deal. It is not just restricted firms, plenty of independent and non-regulated business receive marketing packages, some into sister companies which are hard to trace. There is also the other party to the transaction. Is Sesame Bankhall Group the only business in the wrong, or just the only one who left a smoking gun behind?
Thirdly, there are no advisers, staff or regulatory changes to blame. Well regarded individuals such as Stephen Gazard and John Cowan are left to pick up the pieces. The deals were struck by senior management who were handsomely rewarded before exiting. Given the FCA has taken individual action against those culpable in other networks, why has this not happened this time? Who will pick up the bill in their place – the advisers?
There were a lot of similar deals struck around 10 years ago in the wake of depolarisation. There was a Dear CEO letter and regulatory guidance but little changed. RDR, and the possible move towards restricted advice created a similar environment a decade later and the outcomes were predictable. Many heads of distribution groups came from a provider background so understood just how much they could charge.
My fourth and final question is just how much of the new landscape is still heavily subsidised by product providers. More than anyone thinks, I suspect.
Phil Young is managing director at Threesixty services