Regulation  

Networks must raise fees in wake of Sesame fine

Last month’s £6m fine for Sesame reveals a drive on the part of the Financial Conduct Authority to force advisory networks to change their models to operate much more akin to directly authorised firms, with advisers likely to face significantly higher fees as a result.

Last month, Sesame was fined £6m by the Financial Conduct Authority for failing to ensure the advice it gave was suitable on Keydata recommendations and over broader systems and controls weaknesses.

James Dingwall, director of compliance firm Thistle Initiatives, told FTAdviser that Sesame’s fine demonstrates how the FCA expects principal firms to be able to demonstrate robust systems and controls and is prepared to impose very substantial penalties if it discovers failings.

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“A view seems to be developing at the FCA that these principal firms have not been sufficiently rigorous in the management of their authorised representatives.

“In theory these ARs should be obliged by the systems and controls imposed/overseen by their principal to work to the same standards as directly authorised firms.”

Mr Dingwall also referred to instances where advisory firms have failed - such as in the case of Honister Capital, which was brought down by an inability to secure professional indemnity insurance due to claims against ARs - and left clients of the underlying firms orphaned.

He suggests that this similarly shows a need for networks to change their model, both to reduce the risks associated with advice offered by ARs and to firm up their financial position.

He said: “The FCA is known to be very unhappy about the fact that if an AR loses its principal firm the customers of the AR effectively become ‘orphans’ and the rule book currently does not deal effectively with this situation. After all, it’s the protection of consumers which is the current regulatory focus.

“Clearly in a sector where you can become an AR for very little monthly outlay, there has to be a question over the long-term sustainability of this business model of the principal, or at the very least of current pricing.”

In relation to Sesame specifically, Mr Dingwall said: “Sesame has just been fined a total of £6m, of which over 90 per cent related not simply to the provision of poor advice to consumers through their ARs but was a result of the poor control environment.

“In particular, there was no effective risk management system in place, the file review work was not robust enough and, perhaps most interestingly, it was said that the staff at Sesame appeared to hold an incorrect view that the ARs were Sesame’s customers rather than the end retail customers.

“A key challenge for this business was to provide a regulatory oversight function rather than a service provision function and this was described as a key failing. There needed to be the correct balance of independent oversight, supervision and challenge.”