News that the FSA is conducting interviews among network members to assess the role their networks play may well be causing fluttering in a few collective dovecots. However, what sort of network member is being contacted? The term network covers a number of business models which are different from each other.
The first-generation network takes responsibility for the advice given by its collection of advisory companies and individuals. That responsibility is its Achilles heel and the only way such a firm can be profitable is to have a next to nil claims record and that requires a very expensive and intrusive system of policing. Neither of these factors are popular with the adviser who became independent to escape the DSF big-company environment and wants to keep as much of the fruits of his labour as possible.
What was not fully understood was that the true cost of running the correct level of compliance policing was around 20 per cent of commission. As the number of networks increased, competitive pressures forced prices down to nearer 10 per cent while the level of policing was cut back in the face of adviser resistance. Networks were storing up problems for the future and these arrived big time with the pension review.
Over the last three years, these traditional networks have had to reprice their offerings just at the time that the 1 per cent world and the general downturn of business have impacted on their members.
The screams of anguish have been deafening and with them claims that the networks had fallen down on the job. This is a little like the individual who complains about car speeds on his estate being the first to be caught in the radar trap. The FSA might wish to ascertain the current true cost of running a first-generation network. My guess is in excess of 25 per cent. Is that price and the inevitable intrusion sustainable as a long-term option in a market with other cheaper support options?
A brighter way forward is a model in which each advisory firm is regulated separately but is aided by an umbrella of support and advice. This second-generation network model has the massive advantage of making the members police themselves and that not only cuts down the cost but also ensures that any bad apples do not infect the barrel.
As Mike Owen and I created the first and the biggest of these, you will not be surprised to learn that I still believe that this is the best model for the future. Its Achilles heel is the attitude of the regulator to having big numbers of firms to regulate. Currently, the FSA seems relaxed on the issue of numbers.
Another area of FSA research seems to be whether networks have influence on the product recommendations of their members. The answer is no. A network owner cannot increase the sales of a particular provider. They have as much influence over their members as a bouncer does over the drinking choices of a nightclub's revellers. They can bar the door but once inside the providers are just part of a defined market. But this is only true of a network of independent advisers.
As multi-ties arrive, the networks' influence will increase exponentially. Advisers who embrace this future will find when they look behind the curtain that they are just part of a controlled salesforce.
The FSA needs to look at this seriously. The removal of polarisation will concentrate buying power in the hands of the few. Negotiations will be brutal and not in the consumer's interest but that was always the price of CP121.
Removing polarisation looks attractive but is impossible to police and the casualties will be massive. Perhaps the FSA will complete its researches and realise it is exposing the public to massive dangers that no amount of consumer education will resolve? Perhaps not.
Garry Heath is chairman of the Special Risks Bureau