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Principal principles

There seems to be an unerring belief among introducers that the network&#39s permission for inter-principal or multi-principal agreements with any other principal firm, irrespective of their market reputation, is a prerequisite of a commercially competitive network.

After the significant capital investment that is required to set up a network, principal firms can be forgiven for running a little scared. What if 60 per cent of advisers take the direct authorised route to maintain choice and self-determination? Will there be enough appointed representatives to go around?

Due to the commercial requirement to recruit AR intermediaries, it would seem that networks have two viable alternatives.

First, they may be forced into the position of trying to manage an unwieldy number of provider relationships across life, general insurance and mortgages or, second, have to develop agreements and relationships with other networks, if indeed they are willing to.

Berkeley Berry Birch chief executive officer Cliff Lock-yer maintains that extensive provider relationships are not always in the consumer&#39s best interests as buying power is weakened, leading to poorer pricing and a reduction in applicant benefits.

There are those who bel-ieve that the concept of multi-principal agreements is sound. They argue that network specialism is positive for the consumer but you cannot always expect the same level of expertise in all product areas. This is when multi-principal arrangements work well, they say, the network providing the AR, and therefore consumer, with access to a carefully selected panel of pro- viders via agreements with other specialist principal firms.

The preparation of legal documentation for one prin-cipal network is sufficiently onerous, time-consuming and expensive to turn even the most hardened compliance consultant into a nail-biting wreck, let alone having to prepare multi-principal agreements with the complexities of complaint procedures and the nomination of a lead principal, etc.

With nerves fraying, principal firms are turning to the pages of the FSA rules for solace and looking to the regulator for guidance on how to respond to prospective appoin-ted representatives&#39 demands.

TLT Solicitors partner Philip Ryley says: “The FSA states that a network cannot unreasonably withhold agreement to an inter-principal arrangement – inter-principal being designed to ensure that the market remains competitive for the consumer.”

Let us consider the issues of competitiveness. On the basis that most networks only have a very small percentage of the market, it is perhaps difficult to see how competitiveness would be diminished if it were not mandatory to acc-ept inter-principal agreements as no one player is big enough to influence the market.

It is my belief that the FSA has ensured competitiveness by promoting and convincing so many brokers to go directly authorised.

This, combined with the number of small networks, ensures that there will always be copious amounts of choice and that competitive market conditions will prevail.

If the consumer does not like the products on offer from one network, there will be many alternative providers.

On the grounds of consumer choice and competitiveness, a small player should be able to define their own rules and operate without multi-principal agreements or disagreement with the FSA.

Let us consider the consumer further. The FSA&#39s int-ention is that, by establishing principal firms, the consumer will know who to go to if they have a complaint, the very reason for the information being on an AR&#39s card.

Is it in the consumer&#39s interest for an AR to have several inter-principal agreements for various product categories?

It is conceivable that an intermediary may have one principal firm for mortgages, one for insurance, another for protection products and even one for investments. That means he is an AR of four different firms.

A general insurance broker may need lots of different principals for all their weird lines of business and do not forget that, under the FSA rules, no one can unreasonably withhold from an agreement.

From the consumer&#39s viewpoint I am sure that this would add to a state of confusion about who they turn to complain, and from the network&#39s perspective, which principal takes the lead for complaints?

TLT partner James Touzel makes the point there is a real need for the expectations of intermediaries to be managed when entering a network so they do not think they can go anywhere. “At the moment, the press is whipping them into a frenzy leading them to think they can call the shots,” he says.

What does an inter-principal agreement look like? If you ask all the lawyers around the country currently preparing them for respective principal firm clients, they will all have their own take. The FSA has not provided a template for these agreements, providing the opportunity for law firms once again to make hay from regulation.

It would seem logical and cost-effective for principal firms if there were a standard form of inter-principal agreement,a pro forma that dovetailed neatly and universally for all networks. If the industry cannot agree on an approach, then the lawyers are guaranteed to be kept busy for the foreseeable future.

I suggest that an industry body such as the AMI should bring operators together to create a standard form, benefiting all concerned in time, money and negotiations.

It will be interesting to look back in five years at what all the fuss was about.

Either inter-principal agreements will be commonplace or ARs will be comfortable with what they are selling, prof-essional indemnity insurance will have escalated, driving once directly authorised intermediaries into networks with the balance of power restored.

Without a finite window to recruit, networks will undoubtedly reduce the number of product providers to make panels not only more manageable but also better for consumers and ARs.


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