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FCA clampdown on provider payments threatens nationals and networks

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by Jun Merrett on Sep 30, 2013 at 10:12

FCA clampdown on provider payments threatens nationals and networks

Nationals and networks could be dealt a crippling blow by the Financial Conduct Authority’s (FCA) crackdown on provider inducements to advisers.

Many of the nationals and networks have reported heavy losses for 2012, and rivals have warned the threat to distribution agreement payments could push a number to breaking point.

Earlier this month the FCA released the results of its review of provider payments to advisers. It reviewed 80 agreements struck between 26 life insurers and advisory firms, and found that more than half breached the objectives of the retail distribution review. That followed the regulator’s warning over such deals in a ‘Dear CEO’ letter sent to 24 providers and networks in October last year.

It said some payments by life insurers to advisory firms, such as funding for support services, were linked to securing sales of their products. The FCA also argued certain joint ventures, where a new investment proposition was jointly designed by providers and advisory firms, could create conflicts of interest and lead to biased advice.

Two firms now face enforcement as a result of the FCA’s review. Specialist annuity provider Partnership confirmed the FCA would be investigating a distribution agreement it had struck with an advisory firm.

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12 comments so far. Why not have your say?

D&W Consulting

Sep 30, 2013 at 11:14

I get really frustrated by this! A year ago the FCA made it clear that it was not happy with incentives being abused and many networks, nationals and providers simply tried to "work around" the problem! No surprise we are where we are but sadly for many network members this means a year has been lost in trying to find a better business model for their network.

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Bert Poppins

Sep 30, 2013 at 12:06

If any firm is so reliant on these subsidies that the removal of them would compromise their ability to trade, then they deserve everything they get. perhaps we need more failures like Honister to finally remove the broken models and poor management from the industry. We must also ensure that the individuals within these firms who wander around from wreck to wreck, lording it up as some captains of industry, are prevented from failing upwards.

The unfortunate ones are the appointed representatives and advisers who will suffer.

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Sep 30, 2013 at 12:14

Networks sell/sold membership through promises of training, technical support annual, quarterly and monthly events .none of which they planned to actually to pay for themselves. They would hawk around the market negotiating extra commission and extras as above from providers promising them significant levels of business from their "national sales team". It was wrong and should quite rightly be banned. I cannot see how a network can work. What the industry needs is one very strong Industry body with a strong voice though membership numbers. This would be worth paying a levy to.

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Sep 30, 2013 at 12:30

So networks were ingesting vast amounts of cash, charging the advisers who were part of them sizeable and often increasing retentions and yet, if many ex and current network advisers are to be believed, value for them was not always fully understood or appreciated, the sums being received from providers was another matter.

Networks have many benefits for providers, they also greatly benefit small advisers who are part of them; but they come with many downsides. especially if they go out of business as we have seen happen over the years.

Network collapses are a fiscal version of the 9/11 twin towers collapses, businesses are lost, livelihoods and value destroyed, consumers affected and often there is no way out of the rubble for many.

The costs of the collapse clear up then falls to the FSCS and ultimately back to the reducing amount of surviving adviser firms. Any outstanding indemnity commission debt falls to the provider.

RDR has been a wake up call for advisers. It is a challenge to providers and a potential problem for the financial stability of networks that mostly seem to see losses, not profits.

Challenges for advisers are very well known and are endlessly discussed.

Challenges for providers are not so clear to advisers but I can assure you that RDR for them has been extremely costly in fiscal as well as human terms with massive job losses.

They also face the problem that as ‘manufacturers’ of product, albeit intangible, they still need to “shift those refrigerators”, get products to market. To do that they need a route to market and a delivery vehicle. Pre and post RDR that is mostly by way of intermediated distribution and it seems to be the case that it will continue that way for some time to come.

But unlike before RDR, the manufacturer cannot pay the distributor who cannot be on the receiving end of ‘sweeteners’ to make their products stand out above the rest. A conundrum as well as a challenge in the form of a level playing field.

Networks and smaller directly regulated firms can now ‘play nicely together’ with those smaller directly regulated firms knowing that their network counterparts have not got the benefit of better commercial terms, special rates and subsidy by way of tenuous or blatant links to support organisations.

The FCA makes it clear in Principles for Businesses – Principle 8 (Conflicts of interest) that states “We expect all firms that we regulate to undertake their business in line with our eleven Principles for Businesses. Principle 8 requires that a firm must manage conflicts of interest fairly, both between itself and its customers and between one customer and another. SYSC 10 sets out specific rules in relation to the identification and management of conflicts of interest.

This was not so much about ‘buying’ distribution (after all that is what providers are in business for, to see their products fly off the shelf) it was to make sure they were not blocked from a valuable distribution source.

What we now have is the potential for a level playing field for providers too where distribution success is determined by traditional values of service, charges, performance, rate, innovation, technology support and product features.

And not by who pays the most ‘protection money’ or bulk buys all the ‘best seats’.

Regarding us, when starting Panacea, a key driver was that smaller directly regulated firms did not get the support that networks benefitted from. That was not fair and we wanted to correct that in a way that was free, not distribution driven and created a level playing field. We are supported by providers in an RDR friendly way, by any provider in fact who wishes to support the ethos of seeing the 'little guy' helped along toward creating their own business success. So far we have 42 firms supporting a community of some 17,000 that has produced up to the end of Q2 some £4,046,912,909 of premium income.

Not bad for smaller directly regulated firms, and a shining example of how a community driven by agnostic provider support for adviser firms all in one place can help create better consumer outcomes.

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nicholas pilkington

Sep 30, 2013 at 12:56

@Derek. The interesting point here is (disregarding the rights & wrongs of the situation) is this going to drive some Networks to the wall with resulting chaos & cost dumped on us (dwindling) few who remain.

Whilst it is all very well imposing certain criteria (& I agree in principle a level playing field is desireable) on firms there must be some recognition that we live in a commercial world and we do aim to make a profit without which we cannot look after our clients. If our PI & regulation costs continue to escalate this continues to put increasing pressure on Advisers.

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Sep 30, 2013 at 13:41

@nicholas pilkington And hereby lays the problem. You cannot separate product distribution and advice without consequences- positive and negative.

This could have very serious impacts as the money has to come from somewhere to support networks, I would expect their members will need to pay higher retentions?

The FCA decision is good in many ways, but, rather like the unforeseen consequence of the OFT saying that the 'Maximum Commission Agreement' in the 80's was anti-competitive and must go visiting itself upon financial advisers some 28 years later, this is an unforeseen consequence of regulatory re-engineering that is coming in to land much quicker.

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Christopher Petrie

Sep 30, 2013 at 14:02

As so often, it has been the smaller advisers that have adapted to change. I was at the recent Citywire "retreat" and can honestly say that "those 3 words, said too much" (to mis-quote Snow Patrol) in fact hardly got mentioned at all. People had adapted, and moved on to more interesting subjects.

But Providers and - to an even greater extent - the Nationals & Networks - still can't get their heads around the new world and what it means to them. The faster people understand the FCA means what it says, and secret deals agreed in smoky rooms will no longer be allowed, then the faster they can get their own businesses in order and move forward.

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Sir AA

Sep 30, 2013 at 14:34

I am not sure, the aftermath of this matter would turn out to be as serious as feared or as it ought to be. Given anecdotal evidence, many of these Networks and large distrubutor groups would find ways around the system/regulatory obstacle such as by making their agreements with providers focus largely on support for their "protection and mortgage business; both of which are outside of the rules of RDR for now". The more savy ones would probably set up autonomous services companies and channel the provider agreements and payments through such non regulated entities and there you have it unless, the regulator prohibits such arrangements in which case, for many of these companies, the music would be "there may be trouble I hear ......."!

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David Ferguson

Sep 30, 2013 at 15:34

@Christopher Petrie - absolutely 100% spot on.

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Dandy lion

Sep 30, 2013 at 16:48

It made me sick when I read this, they just can't help themselves can they? What worries me is that this lot will ruin it for the small directly authorised businesses who follow the rules properly and make an honest living giving sound, fee based advice.

Is it that difficult to just do it and cheat?

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Rob Stevenson via mobile

Oct 05, 2013 at 08:36

Network model is just a multi channel distributor, dressed up as an advice firm. If you apply COB rules, they dont work. Best outcome would be providers buying them and clearing up their mess. But there's no incentive for them to do that. FSCS needs restructuring NOW before this mess hits the fund and all sorts of advisory firms get clobbered with the cost.

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Ian Lees

Oct 05, 2013 at 09:25

One of the claimed advantages of a network service is that of higher commissions because of " Bulk Buying" by the network. I recall my days with Bankhall - where I received greater commissions than on offer form providers ( all of them ). I recal my days as a broker consultant ( and direct/tied agent for the mutual ) - who refused to offer DBS - higher rates of commissions - yet Burns Anderson was gifted higher than average commissions ( IE between 100% of Lautro and 150% of Lautro - e.g see Leeds building Society commission terms and the sales of twenty year endowments - EP10 VEP etc.,). The biggest benefit to me as an IFA, at Bankhall, in those days, were the training and the compliance help and meeting with level headed business people and an opportunity to engage. The commission increases helped - but I found I conducted more business as a result of the training on offer around certain products - increased awareness increased knowledge - and focusing on more product sales as a consequence. One reason for this was the refusal of insurance companies to provide any consultant or training on any of their products. The stupidity of product providers - to think that somehow their products will "fly off the shelf", because of their name awareness or their Brand . . . in any other industry - would be laughable. It demonstrates that insurance company Directors are as out of touch with reality as they are with their clients. In the absence and removal by insurance companies and their REFUSAL to provide SERVICE OR TRAINING - meant I moved many clients onto platforms - and stopped dealing with these silly, unprofessional and unethical product providers ( as demonstrated over the years in my comments ). I used to obtain training from PFS formerly LIA - and The Society of Financial Advisers ( SOFA ). Sadly the silly product providers stopped supporting PFS - training subsided - and so I moved to those who could and would and did provide many aspects of training - from a different perspective the IFP. Clearly, for me Financial Planning was the way forward. Removing bias ( and at the same time unethical influence from the sleazy company sales people and their employers - the product providers ) - not relying on unreliable or complex ( indemnity and non - indemnity ) Lautro commissions, or Lautro plus commissions - the varying " allocation rates, the misleading and false claims of the product providers " salesy tied agents " , did not understand themselves. Put simply, the determined, undermining of IFA's and advisers by the product providers - using differing terms and complex insider structures and actuarial calculations - to deceive brokers IFA and advisers - that only those with actuarial assistance could reasonably calculate and determine the real contract terms form the false and misleading statements form all insurance companies. Once advisers realised it was too late - and the Banks purchased many insolvent insurance companies - and exorcised their Undue Influence on unsuspecting clients - who thought their bank operated under Due Care and Diligence or a proper customer care service, rather than their product flogging attacking anyone who entered the bank and operating a policy against everyone in their client bank including the elderly and the vulnerable. Product flogging - Churning Commission generating - in some cases as internal direct and strategic operations e.g Scottish Widows insurance company - paid LloydsTSB their owner commissions - and C&G and Halifax & Leeds Building Society - and Bank of Scotland . Passing names of those likely to offer " opportunity for product flogging " with the " chinese walls" of LloydsTSB - or in my opinion " insider dealing ", without client approval ( a requirement under the FCA ) to pass their names or private and confidential information, or their funds - between companies - without client approval IE in Breach of Data Protection Act, acting above the Law undermining the Rules of the FCA - to the detriment of all consumers. I believe this to be corrupt and illegal activities, which appear to be unregulated. Perhaps they " have got their big guns out ? "

I wonder who is protecting them ?

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