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IFA consolidators say they will be unaffected by FSA warning

Prominent IFA consolidators say they will not be impacted by FSA concerns over the suitability of advisers using their business model as a means of exiting the market.

In its latest small firms newsletter, the regulator says any IFA considering a consolidator to exit the market must identify, manage and mitigate potential conflicts of interest brought about by an unregulated consolidator’s business model, including transparency over any inducements to advisers to recommend particular products or platforms.

But Succession Advisory Services chief executive Simon Chamberlain says conflict of interest will only arise if IFAs are getting paid extra money from a platform to move money onto their service.

He adds: “What the FSA is getting at here is they don’t want to see a mass transfer of funds just for the sake of it. What they want is for each client to be treated individually, and for those clients assets to be assessed to see if they are moveable.”

The newsletter also says any IFA considering the consolidator route must demonstrate that they are continuing to treat customers fairly, explain any additional costs and ensure that added value to the IFA for using a consolidator “should not be to the disadvantage of the customer”.

Chamberlain says: “If any business has been around for more than five years it is going to have a lot of clients in old-style products and now you can buy those exact same funds with exact same tax structure from a platform for a tenth of their price. So any adviser out there who knows he has got a client in old-style products and knows that those products can be moved onto a platform saving the client a lot of money but doesn’t do it then he is in breach of treating customers fairly.”

Financial Inspirations chief executive Garry Heath says the regulator’s statement is not a problem for his firm, but says it is sensible advice from the FSA.

He adds: “There is absolutely no value in a consolidator disrupting the relationship with the adviser and his clients because that is the value the consolidator is buying.”

Perspective Financial Group managing director Damian Keeling says it “wholly” agrees with the FSA’s sentiments, and describes today’s news as a potential shot across the bows of some consolidator business models in the marketplace.

He says: “A business model that depends on aggregating purchased firms assets onto the consolidators own platform may well create conflicts of interest to potential consumer detriment. The consolidator market is made up of a number of different business models, and clearly some are preferable to others in the regulator’s mind.”

Transact head of marketing Malcolm Murray says the wrap is delighted with the FSA’s actions. He says: “We’ve been going on for two years about the importance of suitability tests on every single client before putting them on any platform. I think what the FSA is saying that advisers better be aware of that and the fact they used the words unregulated consolidator leads me to think they have spotted a trend, maybe they are seeing that people are not paying much attention.”

Chamberlain  says his firm is in the process of being regulated, while Heath says: “Most consolidators will have unregulated holding companies but all their holdings will be regulated. So all actions will be regulated.”

Threesixty partner Phil Young says the FSA runs the risk of tarring every IFA consolidator with the same brush unless it specifically targets unregulated firms.

He says: “I do share the FSA’s concerns about some propositions which I have seen, typically from non-regulated firms, which have fairly crass objectives. but what is really frustrating is that people will pick up on the words consolidator and wraps and tar everyone with the same brush. There are plenty of high quality IFAs out there buying up other businesses and using a platform to facilitate this. The critical point, which the FSA make, is that this is part of an advice process, so that each clients needs and requirements are met when considering whether the platform is suitable or not.”

Going forward, Young says: “It will be interesting to see which wraps turn a blind eye and facilitate this, and which of them can afford to turn the business away. Are the Platforms mature enough to self-regulate this?”


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. An unregulated holding company owning a number of regulated firms? How does that work? How do you avoid even minor influence? And what is the point? I am also out of touch with platforms and wraps, are they all unregulated? Any gaps here?

  2. The point of being a unregulated holding company is the company can structure its assets in such a way to maximise the capital sitting in the regulated units. It can also use loans to capitalise the businesses it owns

    It may also own assets that have nothing to do with the financial services industry and that the FSA had no knowledge or competency to regulate.

    It is a bit of a red herring as the directors of each regulated firm is responsible to all the regulations and many of them will be the same people as those in the holding company.

    For quoted holding companies it also has real advantages in avoiding double regulation both from the market and the FSA.

    The FSA makes a good but probably unnecessary point. The only driver a consolidator should have is to maximise the long term value for its shareholders.

    Unless we can inject real capital into the sector now we will have real issues. Not all this can come from equity given the current market and therefore unregulated holding companies can make other arrangements

  3. So, I currently cant borrow money to fund my directly regulated business, or else I fall foul of own funds rules…but if I set up a holding company, that holding company can borrow money, inject it into the regulated company in exchange for equity, and the FSA are completely happy with that??…begs the question what the point of the rule is in the first place really…altho ive always thought the capital adequacy rule to be a nonsense for firms that dont hold client money just makes them go out of business sooner and adds nothing to client “protection”

  4. Your point is made to perfection. It is completely barking. Which Is why I spent so much time fighting its introduction when I was DG of the IFa Association. No other professional is expected to have capital adequacy as solvency is more than adequate for lawyers accountants, doctors etc.
    You could even have super solvency. Solvency plus a sum on deposit maybe.
    At the moment the FSA’s Cap Adequacy Laws are working against its other policies. It wants a smaller number of larger units and it wants advisers to move over to renewal income but large firms find that very diofficult and still hold 13/52’s in capital

  5. Are the FSA not sensing the panic that is building and acting to ‘remind’ some increasingly desperate IFA owners that they cannot just “throw it all on the wrap and then get a bigger payout in a few years time”. I think they assume most IFA owners don’t understand their conflict of interest rules (they would be right on that one).

    Is this really about consolidators or deferred consolidators! Very few deals are being done with any cash up front now, as the market has moved to earn-outs, based on various magic formulas that turn pigs ears into silk purses. If it looks like a duck, and it quacks then its… well you know the rest, and so do the various firms who will be lined up to purchase these hulking great messes in the future.

    Will your consolidator be there when you need them. Only time will tell but for the sake of your kids inheritance, do as much due diligence on them as they are going to do on you!

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