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Out of sight

What happens to existing policies with providers which are outside a panel as some IFA firms choose to tie or multi-tie to a restricted number of providers? It is a big issue and there are several possible outcomes.

First, according to Scottish Equitable business development manager Steven Cameron, advisers could walk away from clients with contracts that do not fall within its panel, saying it is unable to help them with advice specifically relating to that product.

He says: “Another possibility is they say I cannot advise you on your existing contract but maybe what we should do is move you from this contract on to another contract that I can advise you on. There might be legitimate reasons for that but, of course, there might not be.”

Third, advisory firms can find a way for advisers to continue to service the clients, including advising on increments to existing policies even if these are out of their range.

The FSA says there are a number of ways for IFAs can continue to deal with the situation. Spokeswoman Vanessa Wood says: “In selecting a panel, the adviser would take into account the likely needs of their customer base and the various strengths of the providers in each area, so perhaps it would be the exception, rather than the norm, for the adviser to be unable to deal with the majority of their clients.”

She says advisers can provide generic information about an existing policy with an outside provider and would need to take it into account when looking at a client’s circumstances and making future recommendations.

To give direct advice, advisers have two options, she says. They can maintain a whole-of-market offering for existing clients or use the facility in the conduct of business rules which make provision for advisers to provide “out-of-range” recommendations.

Wood says: “In both cases, the adviser would need to be competent to provide such advice and would need to have the appropriate systems and controls in place. For example, an appointed representative would need the explicit written permission of its principal to provide out-of-range advice.”

Cameron says firms which go off-panel face training and compliance responsibilities.”I do not think all firms will necessarily want to offer that facility. On the other hand, if they do not offer it, then there are big issues for servicing and advising ongoing advice for existing clients,” he says.

The magnitude of the issue will vary greatly between firms that choose to tie or multi-tie. Those that have put most of their business through, say, five firms and then multi-tie to those firms will have few problems. But those that tie to firms outside their previous spheres of business could be facing big problems.

Sesame commercial director Charles Bryant says there are a number of ways that multi-tying firms can meet the needs of existing customers, including the ability for advisory firms to encompass both whole of market and multi-tie arms, with clients able to be referred from one to the other.

Firms can also have some multi-tied advisers as well as whole-of-market advisers without splitting the firm.

Then there is the possibility of having hybrid advisers that incorporate both, switching between multi-tied and whole of market to meet client needs as long as they are making it clear to the consumer how the advice process is changing.

For those that choose to avoid the added compliance burden of providing a whole-of-market or out-of-range capability, there are several options, including referring the client to another IFA within their firm that could deal with them, referring them to an affiliated IFA firm or to a third-party IFA.

Norwich Union director of distribution David Barral believes the issue is not regulatory but commercial. He says: “There has got to be a partnership between provider, adviser and consumer. The regulatory frame has been totally relaxed, that is the point here. It is not trying to place people in absolute discrete boxes, it is trying to give advisers flexibility. Therefore, it comes down to what the commercial terms are. In any arrangement, we are discussing, it is about how do you get that balance so you get a win-win-win for all parties.”

Multi-tied advisers are likely to have “restrictive” contracts with their principal, according to Towry Law director of strategy Charles Levett-Scrivener, in order to justify the commission deals they get. He suggests this creates a danger of churning, with an existing policy ditched in favour of one with a provider on its panel.

Others point out that dealing with existing clients is likely to be a bigger problem for firms that single-tie rather than multi-tie as their partnership deals are likely to be far more restrictive.

The regulatory framework may have been set up for meeting the needs of existing business in the new depolarised world but there are concerns emerging that some clients could find themselves orphaned by tying or multi-tying advisers.

Sesame commercial director Charles Bryant says the firm recognises this as a key issue for advisers and consumers and is putting measures in place to make sure that advisers have the “maximum flexibility available to them” within the FSA rules.

He says: “What we would do is provide them with the compliance processes and documentation to enable them to take advantage of all the models available.”

This means giving guidelines to make sure they can move from a multi-tied to a whole-of-market advice process with the customer and do so in a way that the client understands what is going on and the advice process. Bryant believes if a firm can do this, there should be no circumstances where an adviser cannot give advice to an existing customer on an existing policy because it has multi-tied.

He says the industry is conscious of the need to provide options for advisers to meet these needs but he does not believe that all firms that tie or multi-tie will follow this lead.

He says: “I do not think that everyone will go to the same lengths that we are proposing simply because it is very complex. From an adviser’s perspective, it is very important that they follow the compliance guidelines to ensure both the customer and the adviser are protected in terms of always being clear on the basis of the advice.”

Cameron says the issue needs to be monitored. He says: “What the industry should really do is what is most appropriate for the end consumer but I do not know if that will necessarily be the deciding factor in all cases.”

He describes an IFA single-tying as the situation with the most potential for creating orphans and that effectively all existing clients with outside providers could be left unable to be advised on specific issues in this case.

Bradford & Bingley recently announced a tie to Legal & General for some products, and B&B head of wealth products Nigel Newland says it firmly believes the majority of customer needs can be met through tied advice, including holistic financial planning and valuations on existing investments.

He says that, within tied and multi-tied arrangements advisers need to establish what the question really is that an existing client is asking.

He comments: “In those circumstances, if the query — what do I do with my Company X pension, with an outside provider, comes up, you need to make sure you ascertain what the real question is.

“Is it all about their planning for their financial needs, which clearly a financial adviser can do? Or is it a specific query relating to that product, in which case, a tied adviser cannot answer that, it can only provide generic information. In those specific circumstances, the customer will either be referred back to the product provider or to an IFA.”

Newland says customers can, and often do, phone the policy provider directly for information. He says Bradford & Bingley is monitoring the situation and it is providing clients with “relationship brochures” when they make further appointments, explaining about its new relationship and the scope and range of the L&G advisers.

Prudential UK distribution director Andy Briggs envisages that the majority of multi-tie deals will give the go-ahead to do top-ups for existing policies with an existing provider, even if they are not on the multi-tie panel.

He says: “If that is the best advice for the client, and quite often it would be, then I should imagine they would set up the multi-ties in a way so it is fine.”

Briggs suggests that smaller and weaker providers which do not get on to multi-tie panels could slowly fade away as they lose out on new business and grow weaker as a result. He also believes it will be single-ties where the potential IFA orphans will be made, suggesting that the advisers will only be trained and capable of advising on the products of that one provider.

The orphaning issue also raises questions about renewal commission if an adviser is no longer be able to advise an existing client.

The FSA says its rules deal with when commission payment can begin and disclosure at the point of sale so once commission payments have started, in general terms, it can continue to be paid.

Wood says: “This applies where the firm continues to be authorised, as would be the case if the firm chose to multi-tie with a limited number of providers. Whether the commission continues or not would be a commercial decision subject to the agency agreement between the two firms.”

Renewal commission is an issue that the Treasury select committee has already prodded and this could spark further industry debate.

Barral says providers have to be pragmatic about multi-tie deals and check that the commercial agreement is balanced with existing customer needs. This means ensuring that going off panel is done on an exception basis, rather than being the rule. “Other-wise, it would just make a mockery of the commercial agreement between the two parties,” he says.

As Cameron says, the FSA have allowed for this issue, providing the ability to go out of range to meet existing client needs. He says: “But whether or not it does resolve it will depend on whether firms are prepared to allow multi-tied advisers to go down the out-of-range route.”

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