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 firstname.lastname@example.org