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FSA sends out network business model warning

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.


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There are 43 comments at the moment, we would love to hear your opinion too.

  1. Wow, thanks FSA for those words of wisdom, as the industry grapples with RDR there is a risk of consumer detriment and industry strain/risk. We are all only trying to play with the rules that you are imposing upon us, maybe that’s the problem eh ?

  2. So is this the FSA saying that they know this will happen as a result of thier imposition of RDR, but they will blame everyone else if it goes wrong?

  3. As a former member of Network Data and having spent 2 years rebuilding my business following the loss of significant non indemnified income that wasI never received it makes my blood boil when the FSA say there are “A number of networks under considerable strain………”

    How about telling the members of such Networks that their income and livelihood is at risk or implementing rules regarding advisors commission in the event the Netwwork folds.

    We have seen enough car crashes in this industry where it transpired the FSA were fully aware of the situation long before the car hit the wall yet it seems the humble advisor will only find out when his commission payments start drying up and get blamed on technical difficulties.

    If there are Networks signifcantly at risk wouldn’t it be nice for the FSA to let us know who they are so those threatened could take action before rather than after the event.

  4. Never ending rubbish out of the FSA’s own rules, further rules, uturns, changes and a waste of everyone’s time. I suppose they feel they have to somehow justify their own failings by blaming everyone else.
    Perhaps if we were able to get on with the work we do, looking after our clients, instead of dealing with incessant change, we would make fewer mistakes.

  5. Looks to me that the FSA is still continuing its biased towards bank insurance. Instead of continually kicking the industry may be issued start with highlighting what the industry does well. After all for every case that they have found errors or indeed mis-selling there have been thousands of cases where great service has been provided.

    People learn just as much from good practices as they do from just highlighting what is wrong! It also would go towards strengthening the FSA’s or new regulator’s stance on promoting and strengthening financial public awareness.

  6. Suggest to FSA that their own business model is fit for purpose first !!!

  7. What a farce!

    Dear FSA – Why not just cancel every IFA’s permissions right now. Get it over and done with. This really is palpable and complete nonsense. Why create challenges for firms to step up to and then use exactly the same challenges to try to trip them up, criticise and lambast them?
    Once the independent financial services destruction is complete, you will be able to set your hob nail boots on some other unsuspecting organisation instead.

    What is it that makes you despise independence of thought so much?

    A considered answer would be appreciated. Many thanks.

  8. Has the FSA never heard of the phrase ‘chickens coming home to roost’? This is entirely their doing, but, as ever they are completely unwilling to accept responsibility for it.

  9. If anyone from the FSA READS THIS, please post one here why you feel you have to destroy the IFA Industry,
    and put your name on the post!
    (pigs might fly)

  10. Where are Harry and the rest of the good old boys who thought about having a ago at me 2/3 weeks ago? They thought the FSA were the best thing since sliced bread but as can be seen they only want to up the ante so that more fines can be obtained to feather their nest.

  11. This is ridiculous. The FSA have an obligation to protect the industry they regulate and yet they openly state RDR is indirectly putting the public and the industry at risk, its against the very essence of there being, not to mention in breach of their operating code.

    There is no one to complain to too, my MP and SMP will not return e-mails or take any more calls as they no doubt think I’m a whinging nut who cant talk about anything else.

    This farce has to end and obviously things will not improve with the regulator rebrand. This is a systematic and continuous attack of independent advice and personally I cant see any way to stop them.

    Its been the same old quiet outrage for years on this page but nothing has changed, if anything things seem to be getting worse.

  12. According to the FSA everything is a risk now – just so no one can accuse them of taking their eye off the ball.

  13. There is still the problem of networks taking on Advisers who would never acheive Direct Authorisation themselves.
    I know of of one individual who ran up debts of over £500,000 phoenix’ed their company with the help of a friendly insolvency practitioner.
    There needs to be much more focus on individuals from failed firms

    ‘I want to hear about your brightest and best ideas, because next month’s Budget will be all about growth. In particular I want to know what businesses, large and small, want from me.’
    Chancellor George Osborne seeks suggestions for the upcoming Budget on 23 March.


  15. ‘Re Anonymous 11:55. I too was member of NDL and suffered similarly. The FSA knew the difficulty NDL were in and allowed them to submit to press & members that it was a ‘technical’ difficulty. I lost 1 years income because of the FSA.
    Now after imposing RDR, they are saying networks are under financial pressure and concerned about ‘churning’. These conditions have been imposed by the FSA to deliberately decimate the IFA industry to the benefit of the banks, who consistently ‘churn’.
    There is an agenda here and unless the Netwofks fight back, publically & openly and AIFA too in conjunction, everyone, everyone will lose their livelihoods.
    Advisers, of every hue, IFA’s, multi-ties, mortgage advisers, networks, trade bodies UNITE before it is too late.

  16. So Barclays plan to withdraw from the advice market except for high net worth individuals. Several national IFA’s have expressed concerns about the viability of being able to afford to offer “independent advice” post RDR and now the FSA says some networks could be in financial trouble with their current business models post RDR (they probably are).

    So what positive aspects of regulation and the FSA can anyone say has made everyone’s life financially richer ?

    — Worst financial crisis since the 1930’s – Equitable Life, Arch Cru, Split Caps, Keydata etc. etc. – hardly an endorsement that FSA regulation works and now they tell us that some networks may not survive.

    Why not just tell it as it is and that the FSA or FCA wants to eliminate risk or put everyone out of business in the name of “consumer protection” and create a “risk free” society.

    Sorry being cynical but really.

    Sadly I can’t make it to meeting with Mark Garnier and Garry Heath etc in London on 7th March so I suggest anyone wanting to go tries to make it and get your voice heard. Details are on website.

    Good luck

  17. So costs have gone up because of RDR, Income is going down because of RDR and this is none of the FSAs fault?

  18. This is another act in the Farce now playing at a theatre in Canary Wharfe.

    The small IFA would seem to be doomed one way or the other, if it is not the fees or in fact the compensation levies it will be something else.

    I see where this is going, everyone else also has the ability to see where it is going also and the Government does nothing. Mark Garnier has had e-mails and a six page report from me some months ago. He is trying hard (I think) but Westminster has no power therefore I hope he and others are not just window dressing.

    The IFA who has managed his clients well, been around for 25 / 30 years has been caught up in the biggest tangle of regulatory farce ever.

    Some of us with a major sense of fair play and good sense expected to be Grandfathered.

  19. Just to recap, so far only this month, I read an article that national IFAs may not survive or at least struggle to survive post RDR. Just before that I heard that self regulated small firms will struggle to survive, now the very model which should be the favoured route for most IFAs, ie using the new ‘menu’ of services from a network not necessarily being an appointed rep, is in danger!!! These networks are going toward fee based models for services in case many of you think of them as the old network types.

    Barclays tied advisers have left the space as they cant see any future in it.

    What is going to be left?

    The whole problem of regulation is a very simple one, how much can the consumer afford and how much of what they can afford can be used for their own protection?

    Then the FSA would understand the concept of a budget, only solutions which fit within that budget need apply.

    They appear to assume that the public are on average FSA wages and have ten hours to allocate to each financial requirement.

  20. I’m just about to turn IFA and deciding on a good network …. seems I need to get some inside info from the fsa! From the experience readers out there .. which network have they found the best for service/support.

  21. “….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.”

    Couldnt agree more…….so presumably the FSA will be disciplining these networks and ensuring that no customer has lost any money due to the networks failures.

    Otherwise the FSA will be failing to enforce its handbook and letting the IFA sector operate unregulated……..

    I wait to see how many fines and customer redress instructions are issued in the near future.

  22. RDR will save the Networks! 28th February 2011 at 2:32 pm

    Relax RDR has been designed to save the Networks who will benefit from the lack of grandfathering?

    If an IFA’s business has income of say £100K 50/50 initial and trail and a Network takes 15% then the Network earns £7,500 on initial and £7,500 on trail i.e. £15K per IFA member.

    If as AVIVA predicts, 50% of IFA’s are binned post RDR 2012 then the Network will lose the 15% on initial (£7,500) but gain 100% on trail i.e. £50,000. The entire trail reverts back to the Network so instead of earning just £15K they then take 100% of the trail i.e. the Network gains the former IFA’s £50K trail.

    Not a bad swop £15K for £50K, especially when the practice buyout of a Network is based on trail fees and many poor quality product providers are looking to buy Networks in order to benefit from post RDR “restricted advice”, where they can peddle substandard products via advisers without choice?

    This is big money and as such shareholders and corporate law actually dictates the response of Network directors. Asking a Network director to vote against RDR is like asking a turkey to vote for Christmas. This is a regulatory gift and explains why we have the Silence of the Networks! It also explains the Silence of AIFA. Networks make up most of the AIFA Council!

  23. Anonymous | 28 Feb 2011 2:08 pm

    Tenet absolutely superb, ask to look through the ‘extranet’ and rake through all of their services, I have more support there than I did when I was employed and had an inline manager.

    Your problem will be finding all of the services they offer there are so many.

    The suitabilities etc must be written to a very high standard, however it is a dictated style, your own way will be fine providing it hits the required standard.

    PS also they are cash rich, which was a major part of my own decision, they are profitable although their mortgage part of the group lost money last trading year.

    There are no hidden required levels of business, so if you want time out to restructure or have an issue in your life you will not be penalised, some of the others require a min level of business, which actually means their offering is expensive if you calculate it.

    Cant praise them enough.

  24. @ RDR will save the Networks!

    anyone who is with a Network that works as you describe should consider Sesame – The Sesame charge for ex-members is 20% Not the 100% that you claim

  25. there are no knowns.
    There are things we know that we know that we know.There are known unknowns.That is to say there are things that we now know we dont know we dont know. But there are also unknown unknowns.There are things we do not know we dont know.
    FSA 2011 I see the future unknowns.

  26. After about 180 “networks” have gone out of business under the FSA’s Tenure, only now has it been identified as a risk when there only about 20 so called Networks left. Horse bolted………..Still with only a few Networks left to squeeze, I am sure the FSA will be able to maintain their funding with some extra FINES and maybe cause a few more networks out of business. Still the good news is that when there is nobody left to sell anything I am sure there will no longer be a potential for customer detriment!

  27. PO.IFA – not surprising to see your pointless comment again. Seriously, do you have any additional qualifications to (I’m being generous) O-Levels?

    Don’t forget that most of the FSA (albeit divorced from reality in some cases) are highly educated people. They have seen what a greedy bunch “old-style” financial advisers were. Quite rightly they predict that moving into the new environment will mean more costs to compliance, systems and processes etc.

    It is natural for anyone to presume that some advisers will churn and do whatever to make the most.

    What I’m saying is (and what you know will happen is) people who are unable to operate an RDR compliant model will simply vanish. Good riddance. This country needs to get rid of those who (like Buckles IFA) can’t be bothered to do what’s right by clients, rather focus on making the maximum amount of money first.

    If you do an ethical job to start with, it is likely profits will increase with time….

  28. Thank goodness I signed the papers to “sell” my client bank last week! As of tomorrow night, I’m retired!

  29. Many Thanks from message 2.08pm re Tenet info and testimonial… they were on my short list… appreciate your time in replying.
    Seems from a number of comments, I will be entering a shrinking marketplace …. the tide seems very much against me…. looks like I’ll need a sturdy boat, a strong engine and a few paddles in reserve!

  30. The TRUTH ABOUT NETWORKS 28th February 2011 at 4:44 pm

    @Anonymous | 28 Feb 2011 2:08 pm

    My frined let me tell you about Networks!

    Just wait until you try and leave Tenet – then you’ll see their true colours.

    Three months notice with all initial an trail stopped and not paid for four months after you leave if you get the novation through. Your contract stops you placing any buisness anywhere else during this period.

    You need to get out before Sept to stop being charged 12 months PI and Dec to stop being charged 12 months FSA fees.

    They write to every client and stop so doing

    They want every file back andf you are not allowed a copy unless you have express client permission. They will give no undertaking not to destroy the files after six years!

    The Newtwork own the PI, although you pay for it and the PI insurer has a right of subrogations against you. In other words you don’t have any PI. Tenet have a Personal Guarantee on your house.

    My friend if you are a Network member you are at great risk not from the FSA but for the Network!

  31. Matthew Timmins (Simply Biz) 28th February 2011 at 5:07 pm

    ….and that is exactly why you are better off going directly authorised. No this is not a push for Simply Biz, so I’ll declare my hand here first. Why would you want to pay away great sums of the money you make to an organisation which controls your clients, your cash flow and gold plates the FSA rules for you to follow.
    They make life difficult for you while you are a member then even more difficult for you when you try and leave. Direct Authorisation is by far the best route and you don’t have to worry about the financial stability of any Network. It is your business and your clients and You make the decisions. Oh and it costs much less….Problem solved.

  32. Re the truth about networks, you are way behind the times my friend.

    You can subscribe to a menu of services, you do not even need be an appointed rep, therefore nothing you have said is applicable if they chose that option.

    What you speak of is obvious, once you commit to pay FSA fees etc then they are your bills, you have to pay them, the member who is leaving should already have every file for the FSA, this is not an employer scan your files from the start and then it just a case of passing over data not paper files. The networks carry liability so not to hold files etc when someone leaves would be negligent especially to existing members.

    My tip to anon, is make sure you know what a network does, you are the business they supply you with varying levels of services it is not employment where you hand in your notice at any time and dont need to look back.

  33. When will the cretins at the FSA wake up to the fact that it is them who cause all the problems for IFAs and drive IFAs into networks.
    Liquidity problems for IFAs and networks are caused virtually solely by the FSA and FSCS imposing totally unjustified costs.
    Other problems faced by IFAs arein the main caused by the incompetence and ignorance of the fools in the organisation who change the rules we have to work under with no consideration of the disruption they cause.
    A bunch of total bankers. (Must find that button somehow).
    Apologies if this repeats other posts.

  34. anonymous 2.08: If you go to a Network be sure to keep continual stocks available of KY Jelly. This is essential to enable you to get ‘lubed up’ for your bi-annual Network Compliance visit. It is also advisable to maintain a healthy stock of this jelly as you never know when you might have to get ‘lubed up’ again with little notice.

    Other than that, I suggest that you make an appointment to get your head read! Go Direct.

  35. Never trust a Newtwork 28th February 2011 at 5:55 pm

    It is said: “The networks carry liability”

    I attended Legal Solicitrors meeting on this very subject.

    Big Mistake to think a NEwtrok protects you in any way! Read your Network PI Subrogation Clause and note the personal guarantees you give the Newtwork which are never released.

    The Networks asks you to maintain run off cover as well and the SUBROGATION means that if any PI is met then the PI can request compo from the member or former member.

    NB: Former member!

    Go take legal advice – there are several good lawyers in this field. They will tell to keep clear of Networks. They own your clients, your assets, your files and even your PI.

  36. Time and again we see comments regarding network ‘service and support’.

    It isn’t SERVICE and it isn’t SUPPORT!

    Then we see people struggling to join or leave, it isn’t meant to be easy!

    The network is the IFA, the ‘members’ (a DBS con trick) are actually Appointed Representatives, they are exempt from authrisation because the rules say that in order for the network to act as such it must accept liability for all AR acts or omissions in writing.

    The AR and the network have contractual obligations, the AR introduces new business to the network which splits the commission when it has deemed that new business to be acceptable.

    The network is responisble for the AR’s conduct, training and competence.

    The network must maintain PI cover for all business for which it is responsible which is everything ever introduced to it (see above), that means forever or until it fails and the bill lands upon the FSCS. Now don’t panic….

  37. Never trust a Newtwork | 28 Feb 2011 5:55 pm

    Clearly the problem lies with you, not them.

    Know what one is if you become an appointed representative.

    If you dont want to be a full appointed rep, choose services and nothing you have said applies.

    Surely everyone knows of ‘run off cover’ so they know they carry the liability for their own work??

    Who did you want to be pay for your errors? Other members?

    Like others have said, what will be left?

    Not much at this rate.

  38. Network Con - how safe are you? 28th February 2011 at 6:46 pm

    It is human nature to seek security and that is what a Network member thinks he/she has. As a new IFA you swallowed the guff the Networks gave you and now in spite of the fact they have sold you down the river over RDR you still believe what they are telling you and you think you’re safe!

    OK let’s not waste time arguing the point let those Network member and Network directors in our midst go get your PI policy terms out and read them, especially the “subrogation clause”. Then go look at the personal guarantees assigned to the Network – now ask how secure you feel?

  39. To Pissed off IFA

    Am I the Harry to whom you refer? If so I think you may be using poetic licence. I am far from believing the FSA is the best thing since sliced bread.

    Although I readily concede that there is many a good adviser who is in a Network, unfortunately the truth also remains that Networks have been (and to an extent still are) a refuge for the unworthy. I don’t disagree with the comment made by Anon @12.22. in so far as there are those in Networks who may not obtain direct authorisation. And I also think that the person who posted The truth about networks and 4.44 p.m did highlight some of the less ‘cuddly’ practices. Maybe not still applicable to those whom he accused, but none the less anecdotal evidence does point to this sort of problem in some instances with some Networks.

    Naturally many of you made a valid point about the RDR putting pressure on margins and it was very evident that with greater transparency and the abolition of the cosy very high commission deals that were floating about within some networks that there was bound to be cash flow and profitability issues. However I am sure that respondents don’t want to be seen to be defending 7% commission on bonds, for example.

    Much of the Network proposition is now jeopardised – they will not be able to negotiate enhanced deals with providers that historically made their charges to members more cost effective. Moreover they also now stand to loose some control of cash flow if members charge clients a straight fee. It would seem that the menu providers may well be an alternative way forward, or Networks that charge a fixed monetary fee instead of an earnings linked charge.

    So in view of the forgoing I don’t think it is entirely unreasonable of the FSA to mention the fact. What is unreasonable is that those numpties should have seen this coming from outset and provided this warning from the off. This way round it looks as if they are regulating ‘on the hoof’ and paying scant attention to the consequences and likely outcomes of their autocracy.

  40. “The FSA is also concerned that greater emphasis is being placed on moving into new product areas.”

    Hasn’t the FSA said to be independent advisers must consider all products, including UCIS? So I take it they are concerned at their own requirements, since they require advisers to consider all alternatives to maintain their independent status post RDR?

    I think the FSA need to implement some joined up thinking in order to ensure those working in this industry stand any chance of meeting the regulators requirements.

  41. steve underwood 1st March 2011 at 11:56 am

    Have the FSA had a Eureka moment? It would be if they owned up to the fact that they created the monster.

  42. Julian Stevens 1st March 2011 at 5:19 pm

    It’s all very well for the FSA to cast aspersions on the financial robustness of the networks, when all it [the FSA] does is dish out the work and takes all the money in return for getting the networks to do its job for it by proxy.

    And, after all that, the FSA still ends up £14m overdrawn as a result of having paid out £21m in bonuses of highly questionable merit. The average annual FSA pay packet has been reported (by MM) as being £92,848, allied to “a dismal record of failures”. That pretty well says it all ~ pots and kettles spring to mind.

  43. Apparently King is not the only one with a degree in the bleeding obvious!

    Networks were a flawed business model from the start. How is it ever in the customers’ interests to have yet another layer of supply feeding from the trough? Insurers couldn’t see it and now the SFA (having shot at everyone else) is starting to see it.

    I am beginning to feel like the little boy looking at the King’s new clothes…

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