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.
Strain on networks and nationals
Steve Young (pictured above), commercial director at network Sense, said the FCA’s scrutiny of such payments could place nationals and networks under further strain.
‘What concerns me is that some firms doing these deals, without the provider money, will be broke or go bust, which is why this is very significant,’ he said.
‘If what has been published is followed through, it will curtail these payments and have quite a negative effect for the big traditional networks and nationals.’
Phil Young (pictured above), managing director of support services provider Threesixty, agreed, arguing that in some cases nationals and networks were reliant on such agreements for around half their income.
‘The regulator is going to chase these loopholes and close them down. This is going to have quite a radical effect as the number of businesses relying on that money is significant, for some of them it will be 40% to 60% of the business coming in,’ he said. ‘It will have a quick impact on their profitability and question their long term place in the industry.’
‘If you have been taking in £8 million a year from these deals that gets cut and you have 1,000 members, how much do you have to divvy up between them through fee increases to match that level? And who would pay that?
‘A lot of the big networks, nationals and support services providers set up their businesses specifically to make money from this and nothing else, which is why a lot of them offer ridiculously low prices to get advisers in and the head count up,’ he said.
Guidance, not elimination
However, network Tenet, which was among the 26 firms reviewed, said its experience showed the regulator was concentrating on providing guidance, rather than eliminating provider payments.
‘Given some of the large deals rumoured in the marketplace, it is not surprising that the FCA has issued the recent paper,’ said Helen Turner (pictured above), distribution and development director at Tenet.
‘Nevertheless, only two agreements are in enforcement and the consultation paper just issued focuses on governance and detail – which is what the FCA is rightly here to do.’
She said Tenet had not been forced to make any changes to its adviser development programme, which provided continuing professional development training for advisers, and was funded in part by providers.
‘That being said, we are seeing an increasing number of requests from providers to disclose more information regarding the cost breakdown of our programme, which we are happy to do. Alongside this, we are also being asked to sign agreements which they provide, rather than an agreement we have created. Apart from those developments, we have not encountered any other changes following the‘Dear CEO’ letter last year.
‘Under Conduct of Business (COB) rules, a distributor cannot make a profit on training and seminar activity. That principle applies across all our dealings with providers, regardless of product line, where we have consistently ensured that every programme fully complies with COB rules.’
Steve Young said Sense’s agreements with providers related to training events, where it split costs, but that the deals only represented a small amount of its income.
‘If we did not have any of these deals, it would be a very small reduction in our profit but we would still be profitable,’ he said.
He added that restricted advice offerings from nationals and networks were likely to come under the most pressure from the FCA’s scrutiny.
‘I have always had the view that the promotion of restricted advice by certain companies was entirely connected to the amount of money they could take from the providers on their panel,’ he said.
‘If they cannot take the same amount from the providers, it will change their views on that marketplace and I am sure a lot of them will not think it is worth it.’
Changes to payments
Nick Poyntz-Wright (pictured above), the regulator’s long-term savings and pensions supervision director, said long-standing agreements between providers and advisers ‘had suddenly stepped up in value and size’.
‘These deals have now changed shape,’ said Young. ‘There has always been money in the system, but over the years it has gone from jacking up the advisers’ commission and taking a split into a fee-based world. Now everyone’s moved towards blunt and explicit marketing packages which have got higher and higher as well.’
‘With the majority of product manufacturers, the job of people who work there is to induce people and look at opportunities and loopholes to exploit them. Where it is principles-based regulation, which is what we have got, it allows enough opportunity to interpret the rules exactly how you want to interpret them. It is not necessarily a conscious decision to run counter to the regulator but there is a lot of pressure applied,’ he added.
Levelling the playing field
Paul Richardson (pictured above), director of Reigate-based Concept Financial Planning, said a clampdown on provider payments could provide a more level playing field between smaller firms and nationals and networks.
‘I was not surprised by the FCA’s findings on how widespread this is, but it is far more prevalent in the networks than in the smaller firms. If these deals are closed, it will create a level playing field because the leverage distributors believe they had will go,’ he said.
But Tim Page, director of Bury St Edmunds-based Page Russell, warned that smaller firms could end up indirectly hurt by the FCA’s actions.
‘This could level the playing field, so it is cleaner and more competitive, but if the bigger distribution firms are as dependent on these payments as is believed, then we could see more networks fail. Then claims could be brought onto the Financial Services Compensation Scheme, so the smaller players will pay that way,’ he said.