Like me, you are probably a bit fed up reading about the proposed changes to polarisation as announced in CP121. But you have to admit that it is one of the key issues facing us all. There is one area, however, that seems to have received surprisingly limited coverage – the proposed change in the rules governing provider investment in IFAs. There were two relevant proposals in CP121:
Removal of the rules currently limiting investment by providers in IFA firms to 9.99 per cent.
Removal of the better than best rule preventing advisers from placing business with any provider holding an equity stake in their firm.
In Friends Provident's response to the FSA on CP121, we welcomed the proposed removal of the rules preventing provider investment in IFA and distributor firms. We did, in fact, foresee this development some 18 months ago and since last year our own strategy has been to enter into discussion with interested IFAs.
CP121 recognises the fact that the IFA sector is undercapitalised compared with other areas of the industry. A high quality and growing IFA sector will require substantial capital investment to be made in, for example, back-office systems and people development. Our own view, and that of many other providers, is that a healthy IFA sector is crucial to our development plans.
Also, if the CP121 proposal to move to a defined-payment system goes ahead, although we suspect this is unlikely, provider investment in IFAs could make it easier for some firms to bridge the gap in a move from initial commission to fees.
Many of you will recognise that undercapitalisation has been an obstacle to the growth of your business and could continue to be so in future. CP121 gives providers and IFAs the chance to work together to help grow both our businesses.
Finally, the removal of the better than best rule should not cause concern. If we are required to disclose our equity stakes and the suitability requirements are effectively applied and reviewed, with the need to report sales in excess of 20 per cent with any one provider, what is the problem?
We want to see a strong and thriving IFA sector. This must be in consumers' best interests as it will ensure they receive the first-class advice that the savings gap suggests they need. Friends' business strategy therefore includes taking minority stakes in selected IFA groups. The objective is twofold:
To provide good returns for our shareholders.
To support the long-term prosperity of the IFA sector and encourage the take-up of technology, which will reduce costs and preserve margins for both the IFA and provider.
We certainly have no wish or intention to gain control of or influence the placing of the business of an IFA, both of which would be frowned on by the FSA. IFAs know how to run their own business better than any provider. The history of estate agencies demonstrates clearly the risks of providers trying to control entrepreneurial businesses.
If we want to consider investing in an IFA, it is vital that we have a clear understanding of the benefits to our company and the IFA in question. We would expect management of the business to remain with the IFA, acceptable levels of return for our shareholders and openness to multi-provider investment. It is obviously vital that the IFA also meets certain business criteria, which may vary but will undoubtedly include:
A business plan showing robust and profitable growth potential.
A management team of experience and quality.
Minimum annual-premium income or turnover.
If all these fit our objectives and strategy, it should be good for Friends, good for the IFA business and good for the consumer. And it does work. We have already taken minority investments in IFA firms such as Berkeley Berry Birch and Millfield Group and we will consider further opportunities.
Ben Gunn is managing director of Friends Provident Life and Pensions