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Free network firms

Many years ago, when I still had a few hairs on my head and a far smaller set of love handles than I carry around today, I recall that IFAs’ public enemy number one was the Consumers’ Association, now recast as Which?

Back in the early to mid-1990s, you could not attend a sales seminar, a trade association meeting, a life and pension dinner or even meet a financial adviser for a quick drink down the pub without a diatribe about the failings of the old CA.

Times change and so do IFAs’ favourite bogeys. Today, while Which? is either praised in a lukewarm fashion, albeit through tightly gritted teeth or ignored, financial advisers have found a new target for their ire – the Financial Ombudsman Service.

This was certainly apparent the other week, when a few Michael Winner-esque comments from me about the need to “calm down” over the FOS’s admittedly strange link-up with an unknown consumer complaint website led to yet another outburst from stroppy IFAs.

For the life of me, I just do not understand the hostility to the FOS – with one very important exception, which I will touch on later.

The first and most important thing to realise is that the FOS today is nothing like the old ombudsman services operated by Julian Farrand, first Insurance and then Pensions Ombudsman, or by various regulators such as Imro or the PIA. Even its former chief executive Walter Merricks would not recognise today’s FOS compared with the one that he helped to set up in 1999.

Between April 2009 and the end of March 2010, the FOS handled some 925,000 enquiries, of which 165,000 developed into full-blown complaints.

Of those, the vast majority related to banks, with a mere 2 per cent, or about 3,350, being about IFAs – a proportion that is falling. Of the total number of IFA-related complaints, 39 per cent are upheld.

More detailed figures are not available on the FOS website in terms of how these complaints are distributed within the IFA community.

But separate statistics about the breakdown in numbers per firm suggest that 2,259 businesses each had one complaint referred to the ombudsman during the year, another 584 businesses each had two complaints and 293 businesses each had three complaints.

Of course, one would not want to generalise but I would guess that the above figures overlap with the proportion of complaints made about individual IFAs – except in cases where a move into default of some IFAs is preceded by a rapid rise in the number of complaints they face, leading to them deciding to pull the plug.

Last week, we also saw the publication of the FOS’s third set of six-monthly complaints data relating to individual financial businesses, including banks, insurance companies and investment firms, covering the period between January 1 and June 30 this year.

Out of a total of 84,212 new complaints, almost 90 per cent related to 160 financial businesses, with the number of complaints ranging between from 30 and 12,750.

Again, what this appears to indicate is that IFAs are – relatively – blameless when it comes to complaints against them from their clients. The exceptions are networks such as Sesame, which had 108 complaints brought against them, half of them upheld.

In any normal world, this would be seen as good news by the IFA community, something to be trumpeted loudly by advisers’ trade bodies as a sign of their members’ growing professionalism. Yet all we hear instead is the moans of a handful of IFAs about the fact that, perhaps unwisely given the lack of transparency of the firm involved, the FOS endorsed a promotion that gave away a free Apple iPad to the “best complaint”.

Boys and girls, to be honest with you, that is missing the point entirely. I mentioned earlier that there was one important exception to this and there is. It is the fact that many financial advisers are forced by their networks to bear the cost of complaints made against them.

Firms are permitted three “free” cases per year, with a £500 case fee for dealing with client complaints regardless of the outcome, but a network counts as a single firm. What this means in effect is that a network like Sesame, which, as we have seen, received 108 complaints against it in the first six months of this year, will immediately pass on the cost of dealing with 105 of them to IFAs.

I have said this before, but this is an outrage. My own view is that the FOS ought to be “persuaded” to examine the underlying composition of a “business”, especially when looking at networks, so that the individual IFA receives free cases, not the network itself.

Either that or networks should be “persuaded”, as part of their marketing proposition to members, to say they would pay for the first two free cases for any member firm as long as it does not lead to a complaint being upheld by the FOS.

If either policy were to be introduced, it would not only be much fairer, it would also reduce the potential for anti-FOS whingeing at a stroke. If I were new Aifa director general Stephen Gay and trying to curry favour with the IFA community, I would get my thinking cap on.

Nic Cicutti can be contacted at


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. Nic, you need to read up on the Appointed Representatives Regulations 2001, an almost carbon copy of the 1986 version, it is a fact that ARs are exempt from regulation because they are contracted to introduce business to an IFA which has elected to become a network in order to accept these introductions for which they pay a split of commission, or take a split of fees, these are the regulations, not my imagination. Some people might argue that this is anti-competitive. Another fact is that the networks dominate the Council of AIFA which unfortunately results in the representatives of real IFAs being unable to get a word in edgeways.

    As the network is the regulated firm (IFA) it is only allowed the specified number of ‘free’ FOS thingy’s. Until the legislation is changed you are wasting your breath, in fact I wonder why you have brought this long standing situation up in the first place, surely there are more important things to write about.

    My worry is that many network ARs will be caught in the same net as the Park Row people and others if, or more likely when, the FSA demands a ‘skilled person’ examines the files the network has already deemed to be acceptable.

    Should these IFAs go for direct FSA authorisation before they are ‘banned’ for life by these ‘skilled person’ reports which are based on what is deemed suitable advice relating to charges alone? Should they passport in from another EU state (not a panacea), or should they follow the lead of the CFEB?

    Even if they survive the RDR an IFA smaller than mid cap is unlikely to survive the EU regulatory jackboots which will follow some years later, this includes all intermediaries whether they be in mortgages, insurance or even stock broking.

    The regulated need one representative body, not the dozens that are out there plying their trade and getting nowhere, has Chris Cummings moved to the largest iceberg still afloat just in time?

  2. “Between April 2009 and the end of March 2010, the FOS handled some 925,000 enquiries, of which …………….the vast majority related to banks, with a mere 2 per cent, or about 3,350, being about IFAs ~ a proportion that is falling. Of the total number of IFA-related complaints, 39 per cent are upheld.

    Hard data. And the IFA sector is steadily improving, driving ever further down the number of complaints referred to the FOS. All this is resolutely ignored by the FSA, which instead continues with its completely laissez faire attitude towards the banks, despite a few noises (which are no more than echoes of what the government has been saying) about requiring them to beef up their balance sheets. Meanwhile, the systematic persecution of the (admittedly not perfect) IFA sector continues. Should not the FSA be prioritising allocation of resources to the areas of the industry manifestly responsible for the greatest degree of consumer detriment and “bad outcomes”? Of course it should. Any regulator should. The FSA’s masters at the Tresury should be ensuring that it does. But they don’t and we all know why. Blackmail and corruption.

    Incidentally, the few complaints we’ve had in the thankfully now distant past, mainly about mortgage related endowments, were all very well handled for us by our network. Two were referred to the FOS. One was rejected and the other was one on which the client had lied no less than five times. These lies were all eminently proveable and were all acknowledged by the FOS, but still an award of £200 was made against us for “stress and anxiety” caused to the client ~ like he didn’t lie about that too? I damned well know he did.

    And you wonder why IFA’s aren’t exactly the biggest fans of the FOS?

  3. The treatment of AR’s by their principal firm is almost a pure commercial one. Principal takes on the risk, AR get’s to trade without direct regulatory responsibility and capital costs. IF, and it is an IF, the principal elects to pass any redress/compliant costs on to the AR then that is a commercial decision – as is the decision by the AR to accept that network.

    If an AR firm feels that a) it can handle complaints better than its Principal and b) it shouldn’t have to meet excess/redress costs then it has two options 1) find a new network and 2) go directly authorised.

    From the outside looking in, the problems most networks have had is that they haven;t been commercial enough and simply allowed the AR’s to rule.

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