Martin Davies shares his views on the benefits for advisers joining a network under the new regulatory regime
With the deadline for the new Financial Services Authority (FSA) compliance regime fast approaching, brokers and intermediaries who have not yet decided on their approach face a simple choice. Do they apply for direct authorisation by the FSA or do they become an appointed representative (AR) under a contract with an authorised company?
On the face of it, it looks an easy decision. Why not let someone else worry about authorisation and the ongoing responsibility for compliance, while the broker gets on and does what brokers do best, advising their clients? But it is not that straightforward. As an AR, your principal - a product provider, an intermediary or a network that is authorised - will want something in return for overseeing your regulatory obligations.
Technology
Let's assume a broker joins a network as an AR. What do the parties get from their relationship? The network will accept responsibility for the broker's regulated activities and compliance with the FSA's rules. To do this it will need to embrace the AR in its training and competence scheme, monitor its operational activities and provide expert guidance and support. In addition, the network will cover all FSA-related fees, meet capital adequacy requirements and the provision of professional indemnity insurance cover as defined by the new regulations.
Technology is becoming increasingly important in helping networks ensure that their members are compliant. At least one of the leading national networks is already known to be working on the development of systems that will enable their compliance team to:
• Ensure that members are providing the right documentation to clients during the sales process.
• Monitor and manage their training and competence scheme.
• Maintain compliance records relating to the member oversight function.
• Provide automated member access to their central document library, the FSA website, compliance updates and course schedules.
Without technology it will require extensive manual effort and increase the risk of falling foul of the FSA's rules.
The AR's relationship with the network could also yield other benefits:
• The provision of IT support and access to online services such as quotations and application submission - invaluable in the fight for cost efficiencies and service differentiation.
• Access to a wider choice of product providers and their products.
• Enhanced commission on some products through network volume deals.
• Effective operational and accounting processes.
• Access to investment capital and expertise to support business expansion plans.
• Introduction to other members with complementary services.
• The inherent publicity and marketing associated with the network - particularly if it is a large regional or national.
So if that's the upside, what is the downside? Well very little in reality. As long as you can prove to the network that you are financially solvent and conduct business properly, there is a sound basis for agreeing an AR relationship.
And what about the network, what do they get from their relationship with the AR? It varies; some will use their combined membership scale to negotiate enhanced commission terms with the product providers, some of which may be passed on to members as a benefit of membership. Others will simply charge a percentage of the AR's turnover. But whichever method is used, it is directly linked to the volume of the AR's business and is a great motivator for the network to help build and develop the AR's business.
Compliance
The alternative, of course, is direct FSA authorisation. For the smaller broker or intermediary, this is a potentially time consuming leap into the dark. And what about the risk? This may not be immediately apparent, but it could be when the FSA comes calling. If you do not prove you are compliant, the impact could be devastating.
But there are some advantages in choosing this route should you decide to. You could become a principal and sign up some ARs, but if this is not part of your game plan then it is not a real benefit. It is true that you can stay in absolute control of your own business, but that should also be true if you are an AR. Any other potential benefits of direct authorisation, particularly for smaller players, are hard to identify, which seems to be making this option increasingly unattractive to this section of the broker community.
However, whatever course those brokers or intermediaries who have not yet made up their minds choose, they had better do it fast if they want to be doing business once the new compliance regime is in place.
Martin Davies is a principal consultant at Practiv
COVER notes
• Networks have access to considerable technological support, without which staying compliant could become difficult.
• As well as cutting costs and providing advisers with training and support, networks can also give access to a wider product range and enhanced commissions.
