Networks say FSA must help firms after AR advice concerns

The FSA must do more to help firms hit by the economic downturn, according to IFA network Tenet, after the regulator raised concerns about the quality of advice given by appointed representatives (ARs).

In its first Retail Conduct Risk Outlook, the FSA said economic conditions have proved extremely challenging for many advice businesses by dragging on income and profitability.

It added that its supervisory work suggested networks are not doing enough to ensure the quality of advice at their AR firms is up to scratch.

But Keith Richards, group distribution and development director at Tenet, said the two issues were linked, with firms unintentionally stepping back from compliance to address a slump in business levels.

He called on the FSA to do more to ease the cost pressures on businesses, and suggested that a regulatory dividend would help ARs financially and reward strict adherence to networks’ compliance rules.

“No firm would consciously reduce their focus on quality,” he said. “[But] if firms are under financial strain, they will be challenged to deliver the right sort of compliance.

“Operating costs have, for many firms, become untenable. The FSA has a role to play here in helping the industry. Reducing the cost of regulation could be one answer.”

In its Outlook paper, the FSA identified systems and controls weaknesses in the network model as an emerging risk.

It defined this as an area in which it had evidence of poor conduct in firms, but ‘little or no evidence of widespread customer detriment’.

Networks have expressed a desire, in their strategic responses to the RDR, to rapidly expand adviser numbers and to move into new product areas, the regulator said.

But it argued that this would place further strain on the compliance functions which are needed to ensure that robust processes and due diligence are in place when recruiting new ARs.

John Ruddick, managing director at Personal Touch Financial Services, said the regulator would be more concerned about newer entrants to the network space.

“Established networks are geared up to taking on firms on a regular basis. This will concern the newer players in the market, who will feel they need to reach critical mass before 2012.”

Networks’ systems and controls was one of a number of issues red-flagged by the FSA as an emerging risk in the sector. It said it was also monitoring a number of platform-related risks, including independent advisers using a platform as a default option for clients, without considering the wider market.

Elsewhere, the FSA said firms offering individuals incentives to achieve specific targets remained a concern, and repeated its fears about ‘ineffective’ customer risk profiling. This followed a review of clients’ investment files between 2008 and 2010, which found about half of cases included an investment recommendation misaligned to the customer’s risk profile.

The regulator also said it had concerns about the quality of advice and sales processes relating to Distributor Influenced Funds and, in particular, the potential for conflicts of interests.