The future success of smaller intermediaries is less about direct regulation or becoming appointed representatives than with getting the right support to use their entrepreneurial skills effectively.
By January 2005, the sale of almost every retail financial product will be regulated by the FSA. This means that thousands of mortgage and general insurance intermediaries must choose between direct regulation or becoming an appointed representative of a network.
At the end of March, only around 900 firms had applied for direct authorisation, which suggests that the majority have opted for network membership. The issue they face is finding the right network for their needs and doing it quickly to minimise disruption to their business.
Let me make my position clear. Personal Touch is a network which is recruiting appointed representatives from the ranks of IFAs, mortgage and general insurance brokers. Our aim is to build a financial supermarket, which will have a branch in every town, offering a comprehensive product range backed by quality advice and service to the public.
We are aware of the dilemma facing intermediaries. I believe they are being presented with negative arguments which obscure an alternative approach which is based on co-operation and partnership which support entrepreneurial flair and the growth of their business. What are these negative arguments and what are the alternatives?
Argument 1: As an appointed representative, you lose control of your business and your clients.
This is a major concern of many intermediaries. Instead of a business partnership, the relationship between many networks and their ARs often resembles a parent and child. The AR faces a raft of operational restrictions that stifle entrepreneurship, innovation and growth. Intermediaries see their business as their livelihood and ultimately their retirement fund and anything that undermines it is unacceptable.
A key issue here is product choice or lack of it. ARs are encouraged, usually with higher commission, to use one-size-fits-all panels of providers. These comprise the best products but, in practice, they can restrict choice, undermine client relationships and the AR's business.
A directly regulated independent adviser can, in theory, access the entire marketplace. But many providers are reluctant to deal with smaller intermediaries because of the cost of administering small business volumes. As a result, small firms and one-person bands could face restricted product choice.
Argument 2: ARs face more compliance than is necessary.
The rationale is that the principal cannot afford to take chances because it, not the AR, is regulated by the FSA.
This may be true, but surely compliance is inextricably bound up with good business practice and therefore central to building client relationships and a prosperous business. In an industry where the words “good reputation” and “trust” do not trip off the tongue, is too much compliance a bad thing?
Argument 3: Networks overstate the likely costs of direct regulation and professional indemnity insurance.
To say that the cost of regulation and PI is overstated is misleading and disingenuous, especially for a smaller firm.
Aside from the direct costs of regulation, there are many indirect costs associated with the FSA's risk-based approach to regulation. All firms must have a compliance oversight officer and a money laundering officer. The role of a training and competence manager and supervisor must be addressed. These may not be full-time roles in smaller firms but they cost time and money.
Firms must implement the required compliance, training and competence and risk assessment schemes, comply with the FSA's annual reporting requirements and vet advertising and marketing materials. They may also have to complete any theme-based work the FSA may demand regarding specific investigations, for example, into the sale of selfcertification mortgages or equity-release schemes. Fail to do these things and they are out of business.
Compliance work can be contracted out but the FSA will hold the regulated firm responsible for any compliance shortcomings and, if something does go wrong, then blaming the contractor will not save your business.
For firms with no prior experience of FSA regulation, the FSA represents a quantum leap in regulatory rigour.
Then there is PI. Right now, and for the foreseeable future, this is likely to remain high for many smaller firms lacking extensive and rigorous compliance procedures.
Argument 4: Facilitating entrepreneurial flair
Most intermediaries probably care little about the niceties of direct regulation or of being a network AR. They want the best way of building their business to create a capital asset they own and control and can sell when they retire.
What is the alternative? The underlying principle is that the growth of a network depends on the growth of its members. In practice, this would appeal to entrepreneurial intermediaries who appreciate that there are business benefits in working with like-minded intermediaries who offer complementary skills to their own, such as IFAs working with mortgage and general insurance brokers.
For its part, the network must facilitate the business growth of its ARs in two vital ways. First, by investing in the crucial administration, IT, compliance, and training and competence infrastructure.
Second, by providing access to a comprehensive product range. By harnessing the purchasing power of the membership, the network can ensure genuine access to the entire marketplace and not just to restricted panels.
One final ingredient will ensure this can work in practice. That is to ensure that the ARs retain control over the businesses and their clients and so are building a valuable asset, which can be sold at some point in the future.