NetworkMar 16 2022

FCA's scrutiny of ARs force networks to 're-evaluate' models

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FCA's scrutiny of ARs force networks to 're-evaluate' models
FT Montage: iStock, hudiemm, kraphix/Getty

Networks are "having to re-evaluate" their operations and "review membership criteria", according to one major network operating in the advice space.

If approved, the Financial Conduct Authority’s proposed AR reform would require networks to self-assess each member firm every year.

Trade body Pimfa has criticised the FCA's approach, saying networks "won’t have time" to do anything other than performance appraisals under these rules.

FTAdviser approached four adviser networks, asking them to share their thoughts on the proposed regulation following the FCA's consultation - which is now closed - for their thoughts on the proposals.

Quilter Financial Planning agreed to speak on the record, while two shared their thoughts anonymously, and a fourth said it could not comment. 

The whole industry is having to re-evaluate operations, with networks needing to review membership criteria.Adviser network

Networks agreed the FCA’s intentions behind its AR regulation were good, saying the buck stops with principals to ensure the quality of their ARs and to prevent harm to consumers.

But some are concerned about what this re-evaluation means for the future of network models.

“The regulator’s consultation of the AR regime and increasing standards is undoubtedly placing a higher onus on networks,” a network spokesperson said.

They added: “The whole industry is having to re-evaluate operations, with networks needing to review membership criteria and find new and innovative ways to better assess potential risks posed by their members."

Asked whether the FCA’s incoming reform would see networks make cuts to their AR networks, one network said: “We remain committed to the AR model and will not be looking to reduce partner numbers as a result of these proposals.”

Investment manager Sanlam announced the wind-down of its adviser network back in August, saying a network no longer fitted with its business model.

An industry source told FTAdviser against the backdrop of rising costs and regulatory scrutiny, there is a "falling appetite" from networks to share compliance risks with ARs that aren’t "making the cut".

They said: "With the increasing regulatory headwinds, networks simply can’t afford to stand still.”

More work is required to understand the practical impacts of implementation.Harle

Proposals for reform were sparked by the FCA’s conclusion that principals (or networks) and ARs generate 50-400 per cent more complaints and supervisory cases than directly authorised firms do. 

The regulator is therefore working with HM Treasury to limit the AR Regime, introduced back in 1986, in order to reduce opportunities for abuse of the system.

Latest figures suggest: 

  • There are approximately 40,000 ARs in the UK.
  • Some 16,000 ARs work in retail lending.
  • Approximately 12,000 are in in general insurance and protection.

In a post on Pinsent Masons' website, Elizabeth Budd, a partner at the law firm, has told firms to "monitor the outcome of the regulator’s consultation carefully and ensure they have the expertise, as well as the systems and controls necessary to provide proper oversight and control over their ARs".

Worries over practicalities

But one thing worrying some networks is the “practical impacts of implementing” annual self-assessments on every firm.

Gemma Harle, managing director at Quilter Financial Planning, said: “We’re very supportive of the FCA’s aims to strengthen the AR regime. There are many elements of the proposals which we believe will help to protect customers from harm.

“But more work is required to understand the practical impacts of implementation and the associated proposed timeframes in coordination with HM Treasury.”

Harle said there are aspects of the FCA’s proposals which “have the potential to be quite challenging” for firms to implement. 

For example, she said Quilter agreed with the proposal to require principals to provide more information on the business their ARs conduct, but said the regulator should consider how to make ‘information asks’ “proportionate” and limited to requests that will provide “meaningful data”.

“We’re also keen for the regulator to consider a more streamlined reporting process for networks who are making appointments on a more frequent basis,” said Harle.

She said HM Treasury’s idea of a permissions gateway may provide the basis for such a streamlined approach.

Models such as the financial adviser networks have been supervising ARs for many years in line with FCAs expectations.Adviser network

Harle added: “We would hope that the FCA will seriously consider the constructive responses and, where relevant, concerns expressed by firms and trade bodies in their feedback.”

Penalised for errors of others?

Earlier this month, adviser trade body Pimfa said the FCA’s proposals to reform to AR regulation will turn networks into “nothing more than extremely well-paid human resources consultants”.

In its initial proposals, the FCA said the ongoing annual cost of this regulation for the average-size network equated to one working day of three senior managers, and six working days of two compliance staff.

Pimfa has since challenged this, arguing that based on member feedback a network firm which has between 200-250 ARs would require the addition of “at least two full time staff” to gather relevant information, complete the annual reviews and report them correctly.

A final point made by one network was that models such as the financial adviser networks “have been supervising ARs for many years in line with FCAs expectations”, while “this hasn’t been the case in some other markets the FCA has been looking at”.

Reading between the lines, this might suggest some networks feel they are being penalised for errors made by non-adviser AR models in the wider financial industry.

FTAdviser has approached the FCA for comment.

ruby.hinchliffe@ft.com