The FSA has warned that the network model presents a potentially growing risk of consumer detriment due to weaknesses with systems and controls and pressure on income.
In its first Retail Conduct Risk Outlook, published today, the FSA says networks are under pressure financially, and warns that there are issues with networks’ oversight of members.
The regulator says: “A number of networks are under considerable strain, with continuing pressure on income and low levels of profitability. In addition, supervisory activity with networks of various sizes continues to reveal significant issues with the control and oversight that networks exert over their appointed representatives, including monitoring procedures, levels of compliance resource and standards of due diligence carried out on incoming appointed representatives.”
The FSA says that there is a risk these problems will worsen in the run-up to the RDR, as networks push to rapidly expand their adviser numbers.
The FSA is also concerned that greater emphasis is being placed on moving into new product areas.
The regulator adds: “It is not clear to us that either of these strategies are achievable on a wide scale across the market, particularly in the current economic environment and while ensuring firms meet their conduct responsibilities.”
The FSA has also warned about emerging risks related to transitioning to the RDR.
It says that if providers choose to offer larger commission and advisers look to maximise recurring revenue before the RDR is implemented, this could result in unnecessary churn and excessive consumer costs.
Other possible consequences of the RDR that could increase the risk of poor consumer outcomes include:
- sales biases: risk of more churn and that advisers may feel compelled to move into sophisticated products or services to justify adviser charges;
- ongoing service: risk of more transactions than necessary to justify fees;
- provider influence: providers may offer incentives such as consultancy services in lieu of commission;
- compliance: the requirement to change business models will put strain on on adviser compliance functions.