Sector must learn from latest execution-only firm failure

John Lappin

The recent closure of one very well known execution-only intermediary business, complete with a ban for its main director, should concentrate minds in the advice and intermediary sector.

As Baronworth is now defunct, no doubt its liabilities will wind their inevitable way to the FSCS compensation scheme – piling yet more misery on the adviser sector.

On that matter, the FSA has offered what amounts to an olive branch to advisers in the latest iteration of compensation scheme reform.

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It is a rather withered olive branch when you consider what it could do to the profitability of the sector in any one year, wiping out roughly 30 per cent of the amount, and it will hit the less profitable or firms that are ‘just in the black’ a lot harder.

Serious thought ought to be given to some sort of product/advice hybrid levy, but that doesn’t look likely any time soon. It looks like the scheme – both the current version and the next – will continue to inflict damage on the sector.

Taking that as a grim sort of given, it is obvious that there are two areas of risk – the risk of unsuitable advice and recommendations and the risk of mismarketing from the growing execution-only segment.

For this column at least, we will consider execution only. For those firms concerned, reading the final notice about Baronworth makes a lot of sense. For all its media work, it reads as if the firm didn’t have the processes in place in terms of either its marketing and attendant risk warnings or its complaints processes.

The financial crisis can’t have helped – in some cases the FSA may have been too severe or it may have allowed a breach in one place to colour its views of the marketing in others. But it still holds useful lessons to see where the FSA, and its successor, the Financial Conduct Authority, will draw the line.

Many advisers are still in the process of figuring out just how these services will operate alongside their advice businesses, some in liaison with their wrap provider.

It strikes me that the risk will probably be lower where the execution-only service is designed as a lower cost accumulation option, with customers eventually expected to become clients, though I’m sure it may have pitfalls.

At the next level, I suspect that those intermediaries offering mutual funds and products with similar structures may offer services that represent the next level of risk – for example, where the risk is mostly market risk and not counterparty risk, or at least not a lot of it.

The Baronworth situation suggests that it will be structured product execution-only services that carry the biggest risk of mismarketing, though I’m prepared to stand corrected by those in the structured products sector. They may, for example, have a few things to say about the complexity of absolute return funds.