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Spanner in the networks?

An FSA report says networks pose ’an emerging risk’

The IFA network business model is on the regulatory radar. That is one interpretation of the message contained within the first retail conduct risk outlook report from the FSA.

At a headline level, our friends at Canary Wharf have spotted some potential weaknesses in the control and oversight exerted by networks over their adviser members.

This is an important subject because of the potential impact it could have on every adviser, whether a network member or directly authorised IFA.

If the FSA has identified risks associated with this business model, they are likely to focus their attention on this area during the next few years. It would come as little surprise if more intensive regulatory scrutiny results in the discovery of significant problems, leading to enforcement action and business failure and – our perennial nightmare – big compensation costs for the rest of us to pay.

The network issue is defined in the report as an “emerging risk”, which means that the FSA has proof there are problems but no evidence (yet) of wide-spread consumer detriment.

The risk outlook report points to the challenging economic conditions and considerable financial strain being experienced by some networks. These are businesses that tend to operate on low margins and rely on quickly gaining considerable scale to create long-term viability.

But it is the control and over-sight problems that potentially create the biggest risks of consu-mer and industry detriment. This is not restricted to the network business model. Any regulated firm that continues to allow an individual IFA to form and deliver their own advice is running a business filled with risk.

Checking a percentage of cases has never been a substitute for having central control of the advice process in the first place.

There are reasons why network members would resist any move by networks to exert greater levels of control and oversight, including cost.

Where a firm is taking responsibility for the construction of advice, for delivery to the end client by the individual IFA, they need to put sufficient resources in place.

This shifts the value up the chain towards the network and away from each member. This is unpalatable for many individual network members who still believe they deserve the majority of the value from each client relationship, which is why the ultra low-cost network proposition appeals in the first place.

How can these emerging risks be overcome? Networks need to get their business models fixed now, well ahead of the introduc-tion of the RDR. They must start focusing on profitability and quality, abandoning the dream of scale and turnover, and work more closely with their IFA members.

Martin Bamford is managing director of Informed Choice

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Comments

There are 19 comments at the moment, we would love to hear your opinion too.

  1. It’s taken them how many years to work this one out? Do you REALLY need a degree in the bleeding obvious to see it?

  2. I disagree with this, having read a handful of self regulated firms suitabilities (they had their names removed) who had dictated this standard to a quality paraplanning company I see the unchecked as the risk in this industry, the FSA virtually lives in networks and larger nationals, small and medium unchecked firms who have an opinion of themselves are a larger risk.

    How many firms out there have never had an audit by anyone?

  3. So many urban myths persist…

  4. Christopher Sheppard 9th March 2011 at 3:06 pm

    Perhaps all the Network Members should go direct and then avoid any audits?! The FSA keeps a close watch on the networks and in turn the key a close eye on their members. The FSA cannot Audit the Small/Medium firms out there enough as it is. Unless the FSA are going to treble insize to do so? – Doh. Did I just say that?!

  5. Fraser Brydon - IFA 9th March 2011 at 3:06 pm

    Being part of a very rich (money is in the bank) debt free network i’m very content and pleased not to have to worry about ongoing FSA mubblings, the FSA is only after the next batch of fines before they are put out to dry come RDR…. doggy networks are not somethng new are they?

  6. This whole thing revolves around cost, the larger support organisations who charge more provide more and I believe will survive through FSA scrutiny. The other ‘cheap and cheerful’ support structures really fall into the ‘you get what you pay for’ category and this is where the problems will arise. But this is not just in relation to networks, there are many support services for the D.R. world who attract IFA’s purely on cost with no liability whatsoever and this will in time see many more D.R. firms being fined for failing in the areas that the larger firms cover and cover very well. I visit many firms in my role and the story is always the same, the small D.R. firms struggle to understand and implement basic FSA guidlines and sacrifice this against turnover issues which I am sympathetic too, however the regulator does not unfortunately share this same sympathy. It’s the same with the cheap networks, and as a warning to firms attached to these support services just remember Park Row, Alpha 2 Omega and laterly Clarkson Hill, when they go down you go down with them. The days of cheap and cheerful are long gone and shortly so will the firms and advisers attached to them and this applies to either A.R. or D.R. My advice, get yourself sorted and do it quickly, as we move into the new RDR world the FSA will make sure only the fittest will survive.

  7. This can’t be a serious article. The recent conduct risk outlook document flagged almost any business model/IFA proposition as representing significant regulatory risk, including the Informed Choice (portfolio advice service) model. Perhaps the most worrying thing is that these risks have been generally flagged due to concerns over the changes IFA’s are making to comply with the RDR. I’m not saying there’s anything wrong with either the informed choice model or the network model, but to single one out from a document that serves as a heavy warning to the whole IFA industry (regardless of model) appears to be a bit self serving

  8. On this occassion I cannot agree with the author. Networks are closely regulated and distill the FSA rules and guidelines into a clearly understood framework for Independent Advice. It is the very small DR firms still ducking under the radar after all these years where the real risk lies. One particular organisation encouraging the move to the “freedom” of DR just now beggars belief if you ask me. The FSA clearly want to regulate fewer, but better managed, IFA businesses and I suspect they are right with that agenda.

  9. … do the FSA see no “emerging risk” from loss-making tax-payer supported banks continuing to pay obscene salaries and bonuses to their directors in the face of public and private sector cutbacks?

    Fiddling while Rome is burning as usual.

  10. Thank you for your comments.

    @Anonymous | 9 Mar 2011 3:16 pm This certainly is a ‘serious’ article, whatever that means. I accept that the Retail Conduct Risk Outlook report identified a number of current and emerging risks, but within this article I decided to focus on one of these.

    I could happily write about the points the FSA raised in respect of portfolio advice services as well; about how firms need to ensure they update their systems, controls and proposition when they make the move into this advice offering. However, this seemed to be less interesting than the identified network IFA risk, particularly in light of a number of examples I have seen in recent weeks.

    @Mark Cooper | 9 Mar 2011 4:22 pm With respect, I think that is a misguided view of the FSA approach to regulating larger firms including networks. It also suggests that small firms are unable to interpret rules and guidance in the same way (or better) or subject themselves to regulatory scrutiny, either directly from the FSA or through the use of a compliance audit service.

    The only difference between large firms and small firms in this respect is the potential scale of the damage that large firms can inflict on consumers.

    The FSA were claiming yesterday in front of the Treasury Committee that they have no agenda to regulate fewer firms or reduce the number of small IFA firms. They clearly (as any regulator would want) would like to see better managed IFA businesses, but again this does not mean the business has to be ‘big’.

  11. Re Martin you state ‘@Mark Cooper | 9 Mar 2011 4:22 pm With respect, I think that is a misguided view of the FSA approach to regulating larger firms including networks. It also suggests that small firms are unable to interpret rules and guidance in the same way (or better) or subject themselves to regulatory scrutiny, either directly from the FSA or through the use of a compliance audit service.

    Fact the larger firms including networks are checked the FSA is in them for weeks at a time, members will have their files checked by the FSA directly too.

    Secondly how can you state that small firms can interpret the rules correctly and produce advice to required standard if they are not checked?

    You are assuming a lot without being in a role which could draw these conclusions.

  12. @Anonymous | 10 Mar 2011 10:37 am

    I’m saying these things based on my experience of them. Unfortunately we cannot judge what experience (if any) you have of anything as you are hiding behind the anonymous label. Shame.

  13. That is true you cannot see my experience, However we can see yours CAS status for how long and how long ago? With how many firms?

    No experience of other firms and no experience of networks?

    Experience of reading the FSA report only?

    Networks are not always ultra low cost it is often cheaper to be self regulated, it is only low cost if a self regulated firm paid for all of the facilities that some networks provide.

  14. If the FSA or anyone else picks over virtually any adviser’s work with enough intent to find fault, then they probably will find a few i’s not dotted and a few t’s not crossed. We do not live in a perfect world, even though the FSA is apparently obsessed with the idea of creating one, despite the obvious commercial impossibilities of so doing.

    haven’t seen the work of members of any other networks but what Martin seems to be suggesting is that the only way in which networks are going to be able to meet the FSA’s impossibly exacting demands for 100% perfection is for every single transactin to be subjected to pre-approval, whilst at the same time devolving its own responsibilities.

    What I have seen are a good few examples of the “advice” dispensed by the banks, which leads me to believe that the degree of imperfection on this front is vastly greater than that attributable to the average network member. A classic case in point is the recent Barclays/Aviva debacle, compounded by fob-off complaint handling, an 82% uphold rate of complaints referred to the FOS and even a demonstration outside Parliament demanding that action be taken to get the FSA to do its job.

    Hector Sants admitted yesterday before the TSC that no matter what initiatives it imposes on the industry, perfection is unattainable. So it’s a matter of priorities and clearly the priority area for regulatory attention is not network members but the banks. But when it comes to regulating the banks, experience shows us that the FSA is extraordinarily reluctant to get stuck in.

  15. Re: banks
    I can state many occasions of banks giving not only poor advice but unqualified advice:
    e.g. a customer who went to see a mortgage only adviser at her bank when moving home and wanting additional borrowing. She was told by the ‘mortgage only’ adviser that her endowment (not sold by the bank or under the remit of a mortgage only adviser) that endowments taken out pre 1994 did not include any element of life cover, she would therefore need to take out cover for the whole loan and not just the top up.

    The 77 year old lady when asking her bank for advice on savings (she had £20k on deposit) who said she needed to retain access and didn’t want ANY risk and found when her statement arrived in late April that she had subscribed to a stocks and share ISA both sides of the tax year and had been charged for the privilige as well as losing more than £1k in value in just a month.

    The man who went to his bank to take money from his cash ISA to be told he should go back to his adviser and take money from his stocks and shares ISA as he couldn’t access his cash ISA for 5 years (even though it was instant access). If he didn’t want to cash in his s/s ISA the bank would offer him a personal loan which they could set up straight away!

    I could go on and on, why have the banks been getting away with it for so long?

  16. Speaking as an ex mortgage packager I can only confirm that the standard of mortgage applications received from network members was very poor and generally below the standard of directly authorised brokers. In many cases we were lucky to receive a full name on the application never mind an address. In addition I often had to contact the introducer to ask why it was a self cert application and not full status. However I bet the compliance was spot on after the network finished with it.

  17. I am directly authorised and would not have it any other way. I know many brokers who are network members and to date every one has admitted that the reason that they joined the network is because they are afraid of compliance issues and the FSA. I believe that all advisers should be directly authorised to prevent them from hiding behind their networks.

  18. Re Dave I disagree with you, if someone is in a network, large firm or uses one of the services provided by the likes of simplybiz or similar offered by a firm which is also a network the chances are their files will be ‘pulled’ by the FSA.

    There are many small self regulated firms which have never in their entire existence had even one file audited by the FSA.

    This means there could be many people who are adviser geniuses in their own heads, a few years of practising and a few academic qualifications and they listen to all of the horror stories out there and are convinced they are better.

    One audit, 6 cases checked could change all of that.

    I have read some self regulated suitability reports, absolutely perfect at a point in time, but not as they have to be written today to pass an FSA audit, what happens in the audit is different to the guidance etc in many cases.

    I would recommend that small self regulated firms allow a few file checks by an outside source, but make sure it is one which is bang up to date with current compensation claims and regulatory thinking not a person passing themselves off as an ‘expert’.

  19. I agree with Martins’s comments about networks having to fix their business models now. However, I am a new member coordinator for a network and although I cannot speak for others I can say that the general quality of members joining us is usually higher than when they are joining from another network. This is especially true of one man bands direct to the FSA where only 17% get through an induction process.

    Of the smaller firms it is also interesting to note that 55% have not had a face to face compliance visit for over 5 years. Compliance for these firms, we feel, has drifted to irrecoverable failure in some circumstances and they are still trading in the run up to The RDR.

    On the other hand, larger firms who do run a tight ship join because they find they can achieve greater efficiency within their business. Where these firms are chartered there is a marked difference in quality and although all give good advice to their clients the firm can suffers because regulatory reposnibiliites are time-consuming if done correctly.

    The network debate will rumble on and I am sure that I will get some caustic comments but consider say 5 quality firms who join each other and retain brands to centralise reporting functions to the FSA and drive say Wrap costs down for the benefit of their clients. This is a ‘network’ and is an example of what is essentially a good idea.

    Alternatively, consider a large network that just wants to recruit the masses for profit and maybe float at a later stage and I would say yes this model is flawed over the long term. In this example I would also assume that the network would place additional costs on Plans/Wraps for their own ends rather than rebate to the client.

    Some of the small networks which have been mentioned in this article were ‘chasing’ this model which was a recipe for regulatory failure.

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