Networks have been established for a long time within financial services in the UK. Their main attraction is that they provide an umbrella for advisers who want help with administration and guidance on how to conduct business.
Because of their size, networks have been able to obtain better commission rates from providers and also exclusive deals for mortgages and other products.
Networks offer the ideal of allowing advisers to advise within an easy structured process. The network should have whole departments with expertise that could never be achieved by individual advisers.
Due to their size, they should also have direct contact with regulators and have the resources to help advisers keep up-to-date with market developments and any changes in legislation or interpretation of the regulators’ requirements.
One of the problems with networks over the years has been the need to grow to achieve critical mass to have some clout in the market and to maintain profitability. This need to grow has often led to the recruitment of advisers without undertaking sufficient due diligence to ensure a high caliber of staff.
Traditionally, the yardstick of a good adviser for a network was an adviser who could write a lot of business and be profitable to the network. Indeed, those people were feted year after year with awards and “conferences” in exotic places.
This rush towards numbers was often at the expense of quality. With quality being measured as business providing a good outcome for clients. In “the good old days” advisers could go out to sell products without necessarily considering whether the product was right for the client: “This product is the answer, what is the question?”
With minimal fact-finding “on the back of a fag packet” and somebody else clearing up after them trying to piece together some kind of file to show to compliance. Rather than advisers, these were simply super salesmen.
Total number of networks, UK: 2010 to 2016
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The compliance departments within the networks were see as a non-profit making part of the business. The department would often be referred to as a “business prevention unit” because they would be picking up issues and the advisers would be diverted from selling in order to address the issues raised.
Invariably, the compliance departments would be under resourced to undertake the volume of work that was required.
Even now, dealing with advisers is like trying to herd cats. The average adviser wants to take the shortest possible route to completing a sale. The paperwork is simply a means to an end for them being paid. Strangely, remarkably few advisers wake up to the fact that if they do the paperwork correctly the first time, they save themselves time that is later wasted on remedial work.
Even now, dealing with advisers is like trying to herd catsDue to the nature of networks, there is some distance between the network and the advisers. An adviser is likely to work for an appointed representative (AR) firm within the network.
Often, the adviser will be governed by the AR firm and their attitude will come from the leadership within that firm.
This distance makes the supervision of registered individuals even more difficult for networks. It may well be that the AR is of sufficient size to have some kind of layer of supervision within its own structure. Otherwise, the supervision will often fall to the owner of the AR, who themselves may be an adviser.
An adviser is unlikely to make sufficient time to genuinely supervise another adviser. The AR firm may be one of many that is under the network umbrella and therefore any supervision from the network is diluted between many firms. The network may be in touch with the firm, but unlikely to be in touch with the individual advisers.
It is this lack of supervision that creates the problems. Many advisers believe that they know much more than they actually do and due to their own time constraints do not have time to spend getting assistance on matters in which they lack experience or knowledge. Most networks have an abundance of help and information, either on intranet websites or with helplines, but the advisers do not use these enough.
Matters have improved in recent times. But not because of the actions of the networks. These have been brought about by the retail distribution review.
The first thing this has achieved has been to weed out advisers who failed to gain the new level of qualification needed to practice. I always feel puzzled about what those advisers were telling clients if they could not pass a set of fairly straightforward exams.
My experience is that better qualified advisers tend to give better quality advice. Mainly because they have a decent breadth of knowledge and are more aware of alternatives and downsides of particular courses of action.
Secondly, the RDR also required advisers to be transparent about their earnings. The upshot of this is that consumers were able to see clearly what advisers were earning in fees, and in turn may have prevented a bias among advisers towards higher earning products.
Most of the issues that are causing problems for networks are legacy issues and advisers should be behaving more ethically today.
| Key points |
Networks offer the ideal of allowing advisers to advise within an easy structured process RDR has weeded out many advisers who could not achieve the new level of qualification required to practice In the rush to increase their numbers, networks inadvertently took on advisers alongside the liabilities they had built up over time |
However, some of the old issues are still being unearthed by thematic reviews undertaken by the Financial Conduct Authority. The Pensions Review, which started in 2008 is still ongoing. All of the networks have been affected by this review as they all had similar problems. Having been involved with one network in this respect, I know first-hand that nearly all of the advice I’ve checked would at best have been considered to be unclear and quite a lot was simply unsuitable.
This is not a case of the goalposts being moved or of retrospective compliance. The quality of those files was poor and the cause was manifold, such as:
• A lack of understanding by the advisers of the rules.
• A lack of research regarding the benefits available from ceding schemes.
• A lack of consideration of alternatives.
• Clients’ objectives not being clear.
• Paperwork generally incomplete.
The FCA ran a whole set of positive compliance workshops to try to educate advisers as they took the opportunity to publicise their findings from the thematic review.
In the rush to increase their numbers, networks inadvertently took on advisers alongside the liabilities they had built up over time. These days much more due diligence is undertaken in the recruitment process. Also the networks provide a CPD structure to ensure that the advisers are maintaining certain levels of competence. The networks have a lot of knowledge resource and run training in many aspects of financial planning.
Unfortunately, in my experience, the compliance is still not properly focussed. There is still too much tick-box compliance. The file checking is stringent, but focusing on the wrong emphasis. Notwithstanding the continued guidance from the FCA, the suitability letters are still far too long and obviously templated. Therefore, not treating customers fairly.
The people running the compliance functions seem to design forms and processes that are difficult for the advisers to follow and positively unpleasant for customers to experience. They seem to have little experience of the advice process either as advisers or clients. If a process is difficult, the advisers will not want to or be able to follow it.
Networks are improving, but they are still several degrees away from providing the help that advisers really need to enable the writing of consistently high quality business that provides good client outcomes that the FCA demands.
Tony Catt is a compliance consultant
