The network has been a very convenient model through which to do business. Ever since the Financial Services Act 1986 came into being, the opp-ortunity to “network” has been exploited. The best way to describe a network is a “regulatory principal and agent relationship”.
The appointed representative model makes absolute sense to the smaller financial services business. The tradeoff involves the agent (network member) giving up control of their business.
The cost of running a network structure is not cheap. It is a fact of life that the IFA as a customer will look for the cheapest deal. Cheapest is not necessarily the most cheerful. The salutary lessons learnt by ARs of firms such as Interlink Premier, Lifeboat and Network 300 are that being cheap is not necessarily cheerful.
The ARs of Lifeboat and Network 300 have received a level of relief through the acquisition of the network business by Destini and Thinc respectively.
In future, there may be no white knight if networks crash. It is my view that at least three networks are teetering on the brink of insolvency. An analysis of accounts plus the stories of commission being paid late confirm my view.
If a network contract only gives a member a contractual right to receive income, then a real risk exists. The risk is that the network crashes and the members then become unsecured creditors in the insolvency. Furthermore, the agencies of the members become assets of the network in the insolvency.
Not only would a member lose all their pipeline commission but they run a real risk of their agencies being sold to another business. What a potential mess.
IFAs are busy people. The problem with such a high level of business activity is that things are missed. If you are a network member, then you need to stop, sit down and read your contract.
If your network operates on a contractual right to rec-eive commission, then you face a real risk of losing your money and clients if a network crashes. Make sure you check your contract. Look for commission payment clauses.
If a network contract provides commission based on a contractual right to receive, then, with certainty, that right ranks at the same level as other ordinary creditors.
The other option is that the network segregates your cli-ents and commission streams and separates them. De facto, the money would be held on trust for you. If this is the case, then the money is held separately from the trading business. Logically, this means that your money is held outside any insolvency.
The difference in the scenarios are that with one you lose and the other you win.
You need to ask your network where you stand. A letter from your network stating that your sub-agencies are held on trust for you would offer protection in the event of insolvency. If you have no letter, it puts your whole business at risk.
In order to assist, I have drafted a standard letter for you to send to your network. If the response you get is unsatisfactory, then simply leave.
Membership agreement dated ……….
I write as principal of ABC IFA. My appointed representative agreement with you requires clarification. It is my understanding that I have only a contractual right to receive my commission income from you.
If this is the case, then if the network goes into insolvency, I would rank as an unsecured creditor.
This position is unsatisfactory to my business. I am req-uesting your confirmation that my sub-agencies and the income derived thereon will be held on trust in favour of my firm.
My reason for seeking this confirmation is that the current contractual right neither protects my clients or my pipeline income. I look forward to hearing from you with your confirmation that my agencies are held on trust for me.
An example of the nightmare scenario would be the administration of the Interlink Premier Network.
The administrators of IPN sought a declaration that all pipeline income was owned by the network rather than the members. This application to court was resisted by a group of members. The network was successful. This meant that a number of firms lost a lot of money.
I am not going to specifically look at other networks. Suffice to say that our clients who are network members have let us sample their contracts. I have not yet seen an “on trust” relationship.
Take steps to protect yourself. The network model is ext-remely squeezed for financial margins. You need to vigilant and proactive. You have been warned.
Gareth Fatchett is a member of regulatory lawyers Financial Services Legal LLP