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Enmeshed in a network

Whistle the tune from the Great Escape and then send in your letter of resignation.

But the chances of you leaving a network without hassle are remote in a day and age where commercial interests override everything.

In the mad dash to sweep up distribution for the post-CP121 environment, the need to tie in members seems more acute than ever.

The way in which a network operates allows the termination process to be anything other than simple.

The vast majority of members do not give termination a single thought when signing up. After all, why think of divorce when you have only just got married?

Regulatory issues

Every IFA is petrified of a bad reference, a slow reference or a suspension during the termination period. The FSA appears to take a pragmatic approach to members being released and views all references from the exit network objectively.

After all, the key to the new authorisation status is the approval of the FSA. A whole host of negligent reference cases give testimony to court disapproval of damaging and defamatory references.

In preparing your new application, the FSA will expect you to reference those who are to be approved persons and/or controllers of the new firm. By preparing your application and collecting your references, you can ensure that the delays that are created for incomplete applications are avoided.

It pays to spend a little time ensuring that your application is correct. Talk to the FSA as it is there to assist and does provide very useful guidance. Why pay for something which you can obtain from the horse&#39s mouth?

Commercial issues

Commission being frozen is a primary concern of all migrating network members. The way to prevent this is to seek the agreement of the network and the insurance provider to transfer (novate) client agencies to your new firm.

This strategy is risky as the bulk of networks do not offer novation without all other issues being completed. This can be time-consuming and very frustrating. You will find that a vast bulk of obstacles are put in place before the transfer of liability occurs to your new firm.

Professional indemnity issues are also important. Make sure that you are covered for the liability as a departed member firm. Many networks have withdrawn run-off cover as part of the commercial realities of the harder professional indemnity market.

Planning migration

By planning migration, you are putting yourself in a position where you can ensure that you remain in control of your business.

For firms with more than one registered individual, the suggested course of action would be as follows:

Current position

•Existing IFA Limited (RIs Bloggs & Jones) authorised with Happy Network Plc.

•One of RIs (Bloggs) obtains FSA pack to complete.

•Bloggs applies to FSA for authorisation using New IFA Limited.

•Bloggs referenced subject to existing network reference.

•Bloggs resigns as RI with Existing IFA Limited.

•Bloggs receives Part IV authorisation from FSA.

•Bloggs sets up new directly-authorised firm agencies. Either:

– Bloggs migrates clients individually to New IFA Limited or

– Bloggs awaits resignation of Jones from Existing IFA Limited and transfers pipeline business with consent of clients to New IFA Limited.

•Jones applies to be authorised with New IFA Limited as a principal, RI and/or controller.

•New IFA Limited offers indemnity to Happy Network Plc for clawback liability and agencies are transferred.

Client protection

Clients are prepared to be very helpful and will in the majority of cases assist you by transferring their policy agencies to New IFA Firm Limited. The client must be aware that the new business is different and distinct. New terms of business need to be issued.

Dual authorisation

Network contracts prevent dual authorisation. This type of covenant does not in my opinion hold water as it is a clear restrictive trade practice. The FSA does not preclude direct authorisation and therefore I cannot see a court upholding such a biased clause.

Client files

The vast bulk of network contracts are silent on files. The usual position is that a network wants the original files back. Where this incurs a cost to the member firm, it is arguable that this should be met by the network.

Stand your ground on this as a photocopying bill can be massive.

Prior advice liability

It seems unusual that you will retain advice liability when a network insists on the original client files. A member firm must feel confident that it can ensure that the network cannot unilaterally find against it on client issues.

To have no run-off and have liability decided by your old network hardly fills you with confidence.


The current environment has the networks pitted against members. The effects of the long cross-over period can be devastating on a business. Planning is key.

Use the legislation, scrutinise your contract and make sure you achieve what you want to achieve.

Gareth Fatchett is a partner in ProAct Legal Solicitors


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