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Is the network ethic in crisis?

The notion of a network that pools resources to share admin costs while at the same time capitalising on aggregated buying power is far from new.

It is something which has until recently been put to good effect in the IFA community, where the network product has been entwined around a regulatory wrapper to control the conduct of business.

It is curious, therefore, that increasing numbers of people are of the opinion that IFA networks no longer have a place and will ultimately crumble. What has happened to this great idea to cause them to believe it is not working any more?

Over the last three years, we have seen a significant increase in the number of network members who are substantially dissatisfied. Rather than enhance the benefits that are attached to membership, it seems that some of the networks prefer to use scare tactics to discourage members from leaving. Ethical arguments aside, this strikes me as somewhat strange. Anyone who has to keep their members in place by threats must have serious problems within their business model.

The types of threats that are employed are probably well known to most readers but the list has expanded and become more widespread in implication. The freezing of all pipeline income and retention of all client records by the network are employed as standard procedures when members decide to leave.

Some networks may occasionally be over-zealous in pursuing such practices but I would not criticise them for protecting their business interests. What I would call into question are the now commonplace delays in giving regulatory references to outgoing members and, quite outrageously, attempting to deny retiring and exiting members professional indemnity insurance after they have left. Where does that come from?

For a member who has spent some years writing business through the authorisation of a network and, one hopes, complying with the additional standards required by the network, it is a real kick in the teeth to find out that they may not be able to sleep soundly at night after all.

How widespread are the PI ramifications for networks? I believe they demonstrate the shakiness of the network business model. What we will now see will be each and every one of the networks moving to (or, more accurately, being forced to move to) self-insurance for PI.

How will this help members? In the short term, it will allow them to stay in business but beyond the short term it will threaten their existence as claims erode and consequently destroy the capital base. Remember, any losses generated by the network also reduce regulatory capital.

What has happened to the positive aspects of the network approach? I still see great logic in pooling the buying power of intermediaries but, in a post-Sandler world, will this be able to work economically? Will it generate enough income to significantly offset the cost of admin and self-insurance for claims? Remember, some networks are receiving complaints

at the rate of 2,500 a year at present.

What additional income will be granted by insurance companies to networks? I suppose this will depend on how close the ties are. Networks having to dispose of part of their equity base to try and secure a patched-up future income stream may well realise the wisdom of the saying that if you marry in haste, you will repent at leisure.

One only has to look at the financial performance of some networks to see just how difficult it is for them to implement their business models at present. The media have long reported shortages in regulatory capital for some networks while others have hurriedly sold off their family silver in a scramble to secure a future.

A business with falling or stagnating revenues, an increasing cost base and question marks over the loyalty of existing members must surely question its modus operandi.

It will not be sufficient for networks to continue to hope that new entrants will outweigh those exiting. We can clearly see the writing on the wall here, with some networks offering cash advances to new members (clearly buying in turnover) while others are openly in financial difficulties and making losses.

I have not even touched on the level of service to members. All indications are that, despite repeated reassurances, they are not improving. Nor have I spent time on the quality of some of their housekeeping. I could name two networks that still use terms of business that do not fully comply with the latest FSA requirements. How many people do they have working in compliance?

It is time for some serious feedback from network members that will actually be listened to. Not listening to members&#39 views is downright scandalous. It is clear that the class actions being brought to bear against some of the networks will ultimately be damaging to all parties.

Would a little customer service not be more appropriate? I would have thought so. But I am not running a network. Time will tell how this will shake out but I know where I would bet my money.


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