Could the inducement clampdown finally break the network model?
It is certainly a risk. Research from Ernst & Young indicates that the IFA market received roughly £30m of support this year. There are suggestions that approximately half this amount could fall foul of the FCA.
In fact, it doesn’t feel as if the adviser sector in general and networks, in particular, have much wiggle room to deal with the withdrawal or at least non-renewal of this money.
Of course, since it was invented the network model has been said to be under threat. There has been a high rate of failure and some messy rescues, but the bill usually ends up being paid for by advisers through the compensation scheme.
We now have commentators, consultancies and even law firm Pinsent Masons in its excellent Out-Law blog suggesting that the regulator risks consumer detriment by cutting adviser numbers further.
Bruno Geiringer, a lawyer at the firm, wrote that: “The key thing is to judge what is in the consumers’ best interests and forcing more adviser firms out of the market may not be the best solution if there is no alternative route to advice emerging from the market.
“Adviser firms have always maintained that they are able to disassociate their recommendations and advice from any arrangement with a provider and maintain their integrity. That now will not be an issue with this guidance in place, but how far will it go?”
The difficulty, as I wrote last week, is that to defend many of these payments outside of the network world is very difficult.
It may also be an excruciating task to differentiate the different types of support. Some may predate the RDR yet still meet its criteria. Some may be at the boundary of the rules. Other financial support may have been invented or boosted dramatically to help firms still receiving income make up for lost revenues due to the end of the commission system.
For all that, the networks and their balance sheets could do with a transition period, although it is difficult to see how it would work.
We might ask, could the inducement regulations be dealt with to some extent by networks and support firms sheltering under the restricted regulations? Yet it is not entirely at their discretion, if many adviser member firms remain wedded to independent status.
Furthermore, one figure that is difficult to identify is how much the removal of money from a network business then undermines the adviser firms under its umbrella.
But it must be a worry for individual firms. The doomsday scenario sees a network fail to meet its capital adequacy requirements, being prevented from trading and stranding its member firms without regulatory permissions.