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