CompaniesOct 3 2012

Networks: Advisers must share burden when claims arise

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ByDonia O’Loughlin

In the face of recent criticism of networks’ apparent failure to take responsibility for advice provided, the senior executives of two networks have told FTAdviser that advisers must accept their fair share of redress costs if claims arise out of advice they have given.

In a recent Financial Ombudsman Case, network Pi Financial is appealing a decision to pay redress to an elderly investor who was advised by the firm to invest £90,000 into an unregulated collective investment scheme, alleging that the adviser in question breached their authorised representative duties.

According to networks that FTAdviser has spoken to, however, the buck does indeed stop with the principal firm, which for appointed representatives means the network. However, they have also said that the nature of the network model is shared responsibility in situations where redress is required.

Keith Richards, distribution and development director at Tenet, said: “Being a member of a network is more about shared responsibility rather than the network taking all the financial risk.

“The network is responsible for the advice of an AR firm’s advisers, but contractually the AR firm must accept a share of the responsibility in the event of an advice claim - whilst the network will usually absorb the cost of claim handling, the AR would be expected to pay the policy excess under the company’s PII cover.”

He also pointed out that the AR who is contracted to the network, rather than the registered individuals and it is important that all ARs have agreements in place with their RIs to ensure they are not left shouldering the financial responsibility for past advice given by advisers who operate, or used to operate, within their respective firms.

Mr Richards said: “The same provision largely applies to DA firms, where the principal is responsible for the advice given. It is especially important therefore for firms to have clear contracts in place with their respective RIs.”

Richard Pearson, chief operating officer at Positive Solutions, said: “When advice is given, the economic benefits are to the people that provide the advice – financial benefit to the adviser, AR firm and the network. Most of the economic benefit ends up in the adviser’s pocket – it’s very easy for people to not assume responsibility when things go wrong.

“But the reality is that where redress is paid out, some is paid by the PI insurer, some with advisers and some with the network.”