The Financial Conduct Authority does not support advisers’ claims that networks which chase them for costs incurred in compensating their clients are avoiding a statutory rule.
According to section 39 of Financial Services and Markets Act, a principal - the role taken by a network - is responsible for “anything done” by its appointed representatives “to the same extent as if it had permitted it”.
Evan Owen, who heads up adviser advocacy group the IFA Defence Union, has accused some networks of trying to escape their responsibilities under the Act, by using “flawed” contracts to pursue advisers for unsuitable advice they had previously signed off.
“If a network has accepted responsibility in the contract then this is in conflict with the AR having to pay for the mistakes of the network,” Mr Owen stated.
However, a person familiar with the FCA’s thinking told FTAdviser the regulator does not back this view. Its priority is consumer protection, not the relationship between principals and ARs.
While FSMA states a principal, for example a network, is responsible to the regulator for the actions of its AR, the FCA’s position is the commercial contract between the principal and AR - which sets out how they work with each other and what happens when things go wrong - is a separate matter.
Section 39 ensures the end consumer is afforded the same level of protection as if the principal had dealt with the consumer itself, the source said, adding any rules networks put in place to recover compensation they pay to clients of their ARs would generally be a matter of commercial negotiation.
Interpretation of FSMA and decisions about its application would be a matter for the courts.
But the FCA’s stance will come as a blow to advisers battling the cost of complaints relating to advice green-lit by their networks.
Last month FTAdviser revealed advice network Tavistock was pursuing former ARs of Financial Ltd for compensation costs related to advice which had previously passed its compliance and was now deemed unsuitable.
A copy of the Financial Ltd contract, seen by FTAdviser, reads: “The company hereby accepts responsibility, to the same extent as if it had expressly permitted it, for anything the member does or omits to do, in carrying on the business for which the company has accepted responsibility.”
Tavistock declined to comment.
In 2014, Sesame said it would pursue advisers for thousands of pounds relating to PI excesses where ‘unsuitable’ recommendations were believed to have been given, despite telling FTAdviser they would not have to pay.
Sesame did not respond prior to publication when FTAdviser approached it for comment.
The issue of where ultimate liability rests between ARs and their network has long been disputed.
The Financial Ombudsman Service was accused of operating outside the law when deciding whether to hold networks responsible for advice. But the Fos said each decision is dependent on different contractual agreements, adding ‘black and white logic’ cannot be applied to cases involving principals and their ARs.
Mr Owens called the network regime a “nightmare”, and said it was “wholly unacceptable” advisers were being pursued years later when the onus should be on the network to properly supervise the advice in the first instance.
Paul Lockyer, director and solicitor at Lockyers, said it is standard practice for principal firms to retain rights to be compensated against losses they incur which are not insured in respect of professional indemnity claims.
One of the difficulties, he said, is the networks are not present at the point of sale, which means it is not always easy to determine if advice was given properly.
“In my view, the only time a network is likely to be responsible is when it has done 100 per cent prior checking of the work,” he said, adding the ability of a network to recover money from the ARs is dependent on each contract.
He said while contracts must include the line from FSMA, the recovering of redress is not included in legal guidelines because it’s a commercial matter.
David Carrington, sales and marketing director for network Personal Touch, said the network is responsible for ensuring it has sufficient monitoring processes “to assess the quality of the advice as though they were there”.
But he defended networks’ “clear right to claim outstanding debts against former members”, saying that is “very much a black and white situation”.
katherine.denham@ft.com
