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Nic Cicutti: Careful vetting of Honister advisers needed

Depending on who you believe, the demise of Honister Capital was either totally predictable or a complete surprise.

Predictable to a number of IFAs who have commented on Money Marketing’s website about the company’s decision to enter administration after failing to secure professional indemnity insurance – yet for Honister’s 900 registered individuals and 190 back- office staff, it seems the news came as a shock.

It is not clear why that should be the case. In June last year, Money Marketing reported that in the six months to the end of March 2011, Honister had unveiled a combined £700,000 operating loss for its advisory businesses – Burns Anderson, Sage Financial and Honister Partners. Overall, Honister did make an operating profit of £468,000 – but that figure was skewed by the fact that Willis Owen, virtually Honister’s only successful subsidiary business, delivered a £1.18m return.

Moreover, Honister’s stated reason for the decline in its business fortunes even a year ago was a premonition of what was to come. Chief executive Richard Pearson said then: “During the last six months, we have seen the impact of higher regulatory costs and professional indemnity insurance premiums.”

A clue as to why PI costs were rising to unsustainable levels was evident three months earlier when Honister was forced to set aside £3m to cover the costs of a past business pension switching review.

In other words, the firm’s potential compensation liability on this issue alone was three times its annual £1m profit for the same financial year. Hardly surprisingly, PI insurers got cold feet and refused to offer cover to Honister.

The result has been a kick in the teeth for 900 registered individuals, plus Honister’s back office, not to mention the support staff many IFAs employ in their own offices. Equally galling is Honister’s failure to pay pipeline and trail commission.

While attempts to launch a variety of rescue lifeboats to help as many of those RIs as possible are laudable, there are some important questions that need to be asked.

The first and most important is how such a situation could have occurred. The answer is that Honister was an accident waiting to happen. The company itself was formed out of the flotsam and jetsam of other failed national IFAs, including The Money Portal, Berkley Berry Birch and Millfield Partnership.

Like so many IFA businesses with national pretensions, it recruited heavily and without carefully screening the businesses it was merging or assessing the quality of the advisers it was bringing together.

Hardly surprisingly, some of those advisers – or rather, the commission streams they brought to the party – were highly suspect. The result was that when some of those IFAs disappeared, Honister was up the creek without a paddle.

Its announcement last week said it all: “We have been exposed to large claims relating to business written by advisers who have long since left us and this has severely affected the premiums we have had to pay.”

The bottom line is that Honister’s failure was down to its inability to weed out the worst elements of the IFA firms it took over. Hundreds of RIs are now paying the penalty for this failure.

Which then raises another question – what should be done about the 900 advisers after Honister’s collapse?

Judging by the response in the past few days, a number of networks and IFA businesses have leapt in to offer as many ex-Honister advisers as possible berths in their own firms.

This is all highly laudable. At the same time, I cannot help wondering if this is the right thing to do. Sorry, let me rephrase that – it may be the right thing to do but the danger is that not all the worst elements who contributed to Honister’s PI difficulties have long left the company.

As IFAs have learned to their own cost in the past few years, all it takes is a few rotten apples to infect and ruin the whole barrel.

Just one or two individual firms can contribute hundreds of thousands, sometimes millions of pounds to a compensation bill and, knowing the FSA’s inability to weed them out at the time, there could be all sorts of dangers still lurking among the 900 Honister advisers now scrabbling for work.

Back in the Dark Ages, when plague struck, the only way to prevent it from spreading was to create a cordon sanitaire against the home or village where pestilence had been found. Quarantining was a crude but effective way of ensuring that others were not similarly infected.

In the case of Honister’s advisers, there is no doubt that the vast majority are blameless and have always been totally ethical in their dealings with clients. But the chances are equally high that some are not. As we saw with BBB, the Millfield Partnership and TMP, they carry the potential to damage any firm that takes them on.

Tenet, Positive Solutions and other firms looking to boost their numbers by recruiting from Honister would to well to carry out some very careful vetting before offering places aboard their rescue launches – lest history repeats itself and they get dragged into the mire themselves.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 21 comments at the moment, we would love to hear your opinion too.

  1. Can’t disagree with this, it has been a domino effect over the past decade or so – Lincoln to Inter-Alliance to Millfield to Bates/Money Portal to Honister. No lessons seem to have been learnt over this period. At least now it might mean that this process might stop, but unfortunately I suspect we’ll be talking about Tenet/PosSol/Sense/etc in a couple of years time.

  2. some good points, however as JT recently said “hindsight is a wonderful thing”…having had professional involvement with Honister (formerly MP), as well as Sesame, and PS among others, I would say that the systems and controls in Honister, and the calibre of new business checking and the people doing it, was far superior than most other firms’…the weaknesses come from the people at the top being unwilling to terminate or censure firms for malpractice, because of the income they bring to the business (which is on top of the initial lack of in-depth forensic examination of back book business)…however this short-sighted approach usually backfires, as we now see.

  3. I have a client who is £250,000 out of pocket after a Honister employee (sorry but cant describe as an adviser) recommended they make a short term loan as an investment!

    Yes the client should have known better, but really who makes this kind of suggestion to a 72 year old!

  4. Scott Taylor-Barr 12th July 2012 at 11:40 am

    A minor point within Nic’s piece but one that resonates with all AR’s – pipelines.
    It seems wrong that if the Principal Firm goes into Administration all the money in pipeline, as well as business still going through, is forefit to the Principals’ debts – the AR’s who wrote the business are left destroyed in many cases as cashflow ends overnight. This is made worse by the fact that many of these firms will have contracts that state only a small percentage of written business income is the Principals’ “cut”; yet the administrator takes the lot.
    Shrewd AR’s and Principals need to look at this issue carefully and try to finid a way of protecting their members if the worst were to happen in the future – we’ve seen enough failures to know that something needs to be sorted.

  5. I agree too – when does a Phoenix excercise become one versus something like this happening?

    Given the timing, does this mean Honisters FSA/FSCS bill which presumably was large is now unpaid and falls on the rest of us?

    I’m sure most of the IFAs are absolutely top-notch and to them I suggest having been there myself with another network years ago and losing its PI cover – going directly authorised means you are in control of your destiny, ok it has responsibilities too but I sleep better now (mostly).

  6. Here Here Nic.

  7. Difficult to say to Nick C;
    but that article in my view is just about spot on with history and the overall greed of some folks.

    I keep believing that the industry will clean itself up one day. RDR may help but still concerned that some firms somewhere will find ways around the system.

  8. The Right Hon Estly 12th July 2012 at 12:36 pm

    A sad day for some indeed – I regularly met a Honister adviser at the gym and the way he talked about his clients it was clear that he was working towards an RDR model business with his clients. However, he knew well that a lot of his colleagues were still trying to take full up front commission and churning business, whenever they could get away with it, in order to generate income.
    He told me they were banned form the FSA from doing any replacement business and could not write any Bond business, unless it was offshore re IHT planning.
    The writing was on the wall for some time……

  9. Honesty please 12th July 2012 at 1:07 pm

    If the networks are so eager to take on the Honister advisers, that makes me wonder whether they themselves are going down the same route and may anticipate having their own cash flow problems post RDR. So is this a short term fix and yes history repeating itself??????

  10. The plague occurred during the Middle Ages, not the Dark Age.

  11. Anonymous | 12 Jul 2012 11:40 am

    I think that it is the case that all income belongs to the network, which distributes a large share to the ARs. Administrators are probably within their right to keep this income and ARs become claimants to make requests to the administrators for monies owed.

    On the wider point, it apears as simple as this; if you don’t want to stump up the upfront and ongoing costs of direct to market propositions then you have to acept the big risks and general frustrations of being part of a network.

    I’m not an IFA anymore (have been network and direct and I’m still in the industry) but there is no way that I would return as a network member.

    Let’s have another look in three years and see where the network model is when RDR has shaken everything down.

  12. Well said Nic…… but…..

    ….If from the ‘outside world’ there was little surprise, ……then where was the financial monitoring….???…. the regulator should have been in there long before the company ‘decides to’ enter into administration…

    Somehow the words due diligence and a five day turnaround don’t sit together too well…. so I guess there’s more and more of this to come….

  13. “Careful vetting of Honister advisers needed” – what a pointless headline! Surely all advisers should be carefully vetted irrespective of the firm they come from.

    Would Mr Cicutti care to elaborate on any group of advisers who he thought did not need careful vetting? His answer might reveal why he only writes about the business rather than works in the business.

  14. Julian Stevens 12th July 2012 at 4:05 pm

    I thought the golden rule of any acquisition is and has for many years now been never, NEVER take on responsibility for any potential past liabilities.

    Do we know whether or not any of the liabilities to which Honister has now found itself to be exposed are in respect of pre-acquisition business? Or are they solely liabilities which have arisen in respect of business transacted after the relevant acquisition dates?

  15. Does anyone know why the proposed Tenet purchase of Honister was scuppered?

  16. As a Sage member who got out by the skin of his teeth, I can truthfully say that the writing was on the wall and that is why I applied to go directly regulated.

    Over the last 18 months, all pension switchs, bond sales, onshore and offshore have had to be preapproved along with a number of other products. The main reason for this we were told was because of past business.

    Rumour had it that one member had found a way around this by putting up to 200 pension switches through as single contributions, there’s a way round all systems. Apparently the said adviser is now working for SJP.

    I felt 18 months ago the writing was on the wall with Honister and set things in motion to move on, what I find funny is that I had conversations with a number of other Honister Advisers at the time who all also agreed things were starting to go wrong, but have done nothing about it. Oh well

  17. Nic needs to address two issues if he is to suggest Honister advisers should be treated (badly) in this way and subjected to fresh vetting.
    1. What purpose is an SPS and individual FSA resistration if an adviser cannot move smoothly from one firm to another with just firm specific training being required. and
    2. Why does Nic think it acceptable yet again for advisers to be treated any differently to any other job in this country and be treated as guilty before being proven innocent?
    Have all bankers who lost their jobs had their right to trade removed until their innocence is proven?
    What happens to NHS staff when suspected of an unproven misdemeanour? Correct me if I am wrong, most are suspended on FULL pay, not suspended on NO PAY for 6 months or more as can be the case if reauthorisation isn’t handled failrly.
    Signed – A directly regulated adviser.

  18. @ Man down | 12 Jul 2012 1:23 pm

    Absolutely right about the Administrators. AR’s become creditors, along with all other creditors of Honister, and in due course will receive a letter from the Administrators inviting them to a creditors meeting. They will also be asked to provide some evidence regarding outstanding commission and any other monies owed to them by Honister. It will all take a long time to sort out and at the end of the day the AR’s will probably have to accept a payment of a fraction of the amount they were owed – pennies on the pound.

  19. The FSA must have been aware of these shenanigans for at least six months – if not longer. The standard network collapse excuse is inability to acquire PI and I do not believe that the problems were not much more structural.

    The jewel in the crown was the Willis Owen book. It seems to have been hived off. To someone – Hargreaves Lansdown say- it must be worth at least £10m.

    FSA should follow the money.

  20. Exasperated Me 13th July 2012 at 3:24 pm

    “Back in the Dark Ages, when plague struck”

    They killed all the cats that would have killed the rats that carried the plaque.

    That is what happens when you make assumptions.

  21. Re does anyone know why the Tenet deal was scuppered

    Does anyone NOT know why the Tenet deal was scuppered or why a number of other networks suddenly have a recruitment freeze

    And finally if you join a network who demand your comission is paid to them first then why on earth did you do that?

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