View from City Road: Networks dodge the PIA net

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The Independent Online
We have all heard about tax avoidance, but how about regulatory avoidance? This is not an idle question as far as the Personal Investment Authority is concerned.

The PIA was set up to improve the policing of financial sales forces. One of the welcome side-effects is that it is rechecking the credentials of every firm in the industry. Either they apply for authorisation, or they have to go out of business. There were supposed to be no free rides for independent financial advisers; membership of Fimbra, the previous regulator, is not a passport to the PIA.

But now it emerges that hundreds of IFAs have decided against applying to join the PIA, and are instead asking to join one of the existing networks of advisers. This is partly because PIA rules do not allow for the continuation of sole practitioners; the so-called 'four eyes' rule requires at least two people for an organisation to gain authorisation. In other cases, however, the networks may be used as a simple regulatory dodge.

Joining a network allows advisers to stay in business without applying directly to the PIA. Networks are able to obtain a single authorisation on behalf of all their members. It amounts to the PIA franchising out part of its regulatory job.

This is not necessarily a bad thing. The networks have a powerful interest in vetting applicants themselves. If just one of their members gets into trouble, it could result in the entire network losing its authorisation. So they will try their best.

Will that be enough? Some of the networks are substantial organisations, comparable with the sales forces of the bigger insurance companies. Once their ranks are swollen with a new influx of intermediaries, the task of ensuring compliance across the network will be that much greater.

Legal & General, for example, has 1,800 self-employed consultants selling its policies, but is slashing the number to 1,000 to save costs, make it easier to control selling standards and avoid the attentions of the PIA. Size is not always an advantage.

The question has to be asked why these IFAs are unable to go to the PIA directly. Are they afraid they will not match its capital and regulatory standards? If that is the case, they should not be in the business of advising the public on finance.

By registering with the networks rather than directly with the PIA, those financial advisers win an extension to last night's deadline, during which they can continue trading, even if eventually the networks find them unacceptable. That cannot be the way this much-vaunted clean-up of the industry was meant to work.

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