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One for all or all for one? Weighing up the pros and cons of going AR/DA


Debate rumbles on over which status is better for brokers: AR or DA?

Choosing whether to become an appointed representative of a network or directly authorised is one of the most important decisions made by brokers.

The main advantage of being a DA, they say, is in having total control of one’s business and avoiding big network fees and slices of commission.

DA brokers can use cheaper mortgage clubs and support services firms. They can perform their own compliance, cut unnecessary costs and potentially reduce their personal indemnity insurance payments. They can also be truly independent with no restrictions on which mortgage and insurance products they can sell to clients.

But experts highlight risks for DA brokers, two of the biggest being that they have to report straight to the Financial Conduct Authority and they are solely responsible for compliance. The risk of future liabilities from advised mortgage sales having to rest with the DA is a major threat that prompts thousands of brokers to remain as ARs under the protective umbrella of a network.

With regulatory demands piling up, network heads say it is crucial for brokers to consider how they would be affected if they were to report directly to the regulator.

Association of Mortgage Intermediaries chief executive Robert Sinclair says his organisation is agnostic about broker models.

“It comes down to whether a firm wants to sit under a network to gain help, support and guidance or whether it feels it has enough knowledge and certainty to cut loose that cost and run itself within its own framework,” he says.

Martin Reynolds, chief executive of mortgage club SimplyBiz Mortgages, agrees there are benefits for both ARs and DAs but says it is a personal choice.

“Whether a DA or AR is better is down to the individual firm and what works for it in compliance responsibility or business opportunities,” he says.

“Being a DA gives you that freedom so you can structure your advice process how you want it within the confines of the regulatory regime. It is important to some as it allows them the flexibility where required but it does come with extra responsibility.”

LSL director of mortgage services David Copland says brokers are able to choose DA or AR status based on the differing risk profiles.

LSL has two networks in First Complete and Pink Home Loans and two mortgage clubs in Pink Club and The Mortgage Alliance.

“You will get a better deal on compliance support as a DA because mortgage clubs are not taking regulatory risks as if you were an AR,” he says.

But Copland believes there are many benefits to being part of a network, especially around compliance risks and regulatory changes.

“If you have lots of regulatory change, brokers feel more comfortable as an AR when networks are taking responsibility and putting sales processes in place,” he says.

“If you don’t have much regulation, everyone gets used to the sales processes, which may happen after the Mortgage Credit Directive [comes into force in March]. There can’t be much more they can throw at us. So past that, there may be a few more ARs starting to look at DAs.”

As one of the biggest brokers in the UK, London & Country likes to do things its own way, whether through its fee-free structure or by shunning networks. It is a DA firm and a member of Legal & General’s Nouveau alliance, which uses collective bargaining power by loosely uniting the largest DA firms in the market.

L&C associate director of communications David Hollingworth says: “We have always been DA with our own compliance function and we like to look after our own stall.

“We can respond to things quickly and we are masters of our own destiny if we need to make any systems changes. Rather than work within a structure made for many different businesses, we can tailor it for how we want to be.”

John Charcol is also a DA but offers a unique model for brokers, who can become employed or self-employed within its structure.

John Charcol senior technical manager Ray Boulger says: “We have about 85 consultants and I doubt there are many firms of that size that are ARs.

“We effectively have a network for our staff but it’s very different from a normal network. People can join on an employed or self-employed basis. Once they have built up a good bank of clients, those who are on an employed basis will be keen to move over to self-employed.

“It works from our perspective because we can hire more staff but the problem is finding decent consultants to recruit.”

A particular advantage of being a DA is having whole-of-market access to all mortgages and insurance products without the restrictions of a network model. Most networks restrict insurance products to a panel and some restrict the mortgage lenders that their advisers can sell through.

Which Network founder Gary Watts says: “The main reason people become DAs is to get complete independence. Many DAs are fiercely protective of that status because, for example, it is whole of market, but it is not as important as many people think. The reality is that no one uses more than about six insurers. Most networks offer whole-of-market access on mortgages and some give it for insurance too.”

Being in a network means effectively tying oneself to a business partner, so it is important for brokers to know who they are dealing with.

“If you sit under a network as an AR, it is important to pick one that fits your business model; one you have an affinity with,” says Sinclair.

“There is no right or wrong answer but [it is about] how you want to spend your time running a business. For example, there are networks that pay out money quicker and others that delay with a longer payment cycle, so it is a judgement about your model.”

During the financial crisis – when being an AR was regarded as a bulwark against uncertainty – networks started to collapse. In November 2008 Prestbury Financial went into liquidation, followed by Network Data in May 2009 and Mortgage Times at Christmas that year.

Many ARs were left angry and confused and the period serves as a warning that although networks offer security, they cannot provide total safety.

“If you have doubts about the financial viability of your network, you have to take steps to protect yourself,” says Sinclair.

“I hope all networks are taking steps to ensure stability and members should do due diligence on their principal firm to be comfortable that their money is safe.”

Sesame is an example of a mortgage network in turmoil, having suffered a number of setbacks in recent years. In June 2013 it was fined £6m by the FCA for investment advice failings and in 2014 it was fined £1.6m for circumventing the Retail Distribution Review.

In March this year Sesame stopped offering investment advice in order to concentrate on mortgages and in June the firm’s parent, Friends Life – now owned by Aviva – pledged £45m to cover its liabilities. In September, Sesame reported a pre-tax loss of £10.2m and set aside £31m to deal with complaints.

Finally, in the past month, director of mort­gages John Cupis has quit the firm, followed just three weeks later by his successor, Lisa Martin.

Sesame is the second-largest network in terms of ARs and many brokers are concerned about service levels while its attention is focused elsewhere.

“Communication is non-existent,” says one AR, who is waiting to hear about the network’s latest mortgage and general insurance offerings.

Boulger says the network model is a tough business because of thin margins.

“It seems challenging because the margins are relatively low,” he says. “You only need one or two bad firms and it knocks the rest of the ARs with higher costs.

“The FCA seems to be concerned about relatively thin margins and whether networks will operate compliantly. I’m sure most of the main, well-known ones do but economies of scale are very important to provide various services.

“If you have 500 ARs then it can work, but if you have only five it is difficult to justify the cost. It is a numbers game.”

However, being an AR can bring unexpected benefits. For example, last month Personal Touch Financial Services agreed to meet both the rise in FCA fees and higher PI costs in a bid to help its members. Being part of a bigger organisation that can bear the brunt of increasing regulatory fees is a major bonus that DAs do not enjoy.

The latest review from Which Network shows the largest UK network to be Intrinsic with 1,073 ARs, achieving 3.7 per cent growth or 39 extra ARs in the three months prior to August. Many of these will be refugees from Sesame, which saw a 3 per cent drop in ARs for the period – from 895 to 869 – by losing 46 brokers but gaining 20.

PTFS was another big mover during the quarter with a 4 per cent drop from 315 to 303.

Meanwhile, smaller networks such as Stonebridge Mortgage Solutions and Sense Network have enjoyed a good summer, growing by 5 per cent and 7.7 per cent respectively, albeit from low bases. Stonebridge increased from 169 ARs to 178 while Sense Network increased from 84 to 91.

Overall, networks gained 23 brokers during the quarter, representing growth of 0.4 per cent.

But the longer-term figures paint a different picture. There were 5,629 AR brokers at the end of August, compared to 8,085 in 2010, representing a huge 31 per cent drop over the five years.

“The numbers always fluctuate,” says SimplyBiz’s Reynolds. “We are taking on a lot of ARs moving into the DA space but we are also taking on advisers moving out and setting up on their own to go DA. That is a positive sign for the market – that people are wanting their own advice firm.”

He adds: “Sometimes the numbers can be misleading as it is the number of staff [that are measured], because we saw a bit of consolidation in the run-up to the MMR and RDR. It is always hard without individual registration to know how many sit within the DA and AR space.

“There is nothing seismic that [means] one will outweigh the other.”

Watts believes there have not been many new DA brokers recently because the FCA prefers sole traders to remain within the security of a network. He says a lot of brokers are spinning out of existing firms to become ARs.

“We saw a big exit of people during the recession. A number have come back who were out of the industry for a few years but there is also a lot of new blood coming from banks. A lot of brokers are breaking off from their firm and setting up their own business.”

Two key differences between DAs and ARs are how they are viewed by lenders and the remuneration they are receive.

Mortgage Strategy has long campaigned for equality between DAs and ARs on proc fees. Our investigation in 2013 showed DAs to be tens of thousands of pounds worse off than ARs when comparing commission income between 2008 and 2013.

Looking at the proc fee rates of a major network and a major mortgage club, Mortgage Strategy found a DA broker submitting five cases worth £150,000 a month to the UK’s largest lenders would have been paid £69,300 less than an AR during those five years.

But perhaps the tide has begun to turn. In June, Leeds Building Society revealed it had started paying DAs the same levels of commission as ARs.

However, lenders such as Accord, Coventry Building Society, Halifax, Nationwide, NatWest Intermediary Solutions, Santander and Woolwich pay lower proc fees to DAs.

Lenders argue they have more control over networks’ compliance structures and can access many brokers at once.

Reynolds disagrees. “There should be an equalisation of proc fees,” he says.

“The quality of business has no considerable difference – there is good and bad in both forms of distribution.

“If a lender has accepted a case that passes its scorecard and systems and is packaged in the right way, it should be immaterial if it is from a network or a DA. They should be paid the same amount for the same work. It might be a simplistic view but I am yet to have my mind changed.”

Reynolds thinks new lenders such as Kensington are transforming the market by not discriminating on distribution channels.

“We will see more lenders equalising fee structures,” he says.

Copland believes DAs lose out on higher proc fees because lenders do deals with
networks and like the large numbers they can access securely. But things are changing, he says.

“The pendulum is shifting. There is more competition in the market and lenders are having to open their doors to DAs. Previously they were happy to take, say, 400 ARs from a big network and know the compliance was up to scratch. That is different now.”

Hollingworth believes lenders’ general stance does not reflect how business is conducted and he thinks proc fees should be neutral.

“The argument about whether there should be parity on remuneration and whether AR business is better never goes away,” he says.

“You can have good, bad and indifferent in all areas so, if we move towards a new quality-based remuneration, it should reflect all types rather than an assumption that one is superior to another.”

DA versus AR

Directly authorised


● Being free to run your business as you choose and being able to tailor support services to your firm
● No network fees and you can keep all your proc fees

● Compliance risk is entirely with you and your firm
● No support is available from a bigger group to shoulder regulatory fee increases or unexpected issues

Appointed representative

● Generally lower PI costs than DAs (apart from networks with a chequered past)
● Having the security of a bigger group to weather unexpected storms
● Liability rests with the network

● Network fees can be expensive with some raising costs to pay for the claims of other ARs or to improve compliance services
● Restrictions on which mortgage lenders and insurance providers you can deal with

The benefits of being an AR

Toni Smith, sales operations director, First Complete

The conversation about whether to be an appointed representative of a network or to be directly authorised by the FCA has existed for as long as the two models themselves.

The overwhelming reason to be an AR is so that an adviser can run and grow their business safely and compliantly, focusing on what they do best – advising clients – while their host network takes responsibility for compliance and regulation.

As well as providing a sturdy framework for an adviser to operate in successfully, a good network provides ongoing training and guidance on all regulatory impacts, ensuring advisers conduct their business in the best interests of customers.

While a key benefit of being part of a network is that it navigates the ever-changing regulatory landscape on behalf of ARs, it is about much more than that. There are also the proposition, products and services for ARs to consider; it is no good having a slick and robust sales process if the products and services on offer are narrow, uncompetitive and not market-leading.

Proposition does not stop at products. Service and support from network personnel should add genuine value to an AR’s business, such as by having expertise at the end of a phone to help place mortgage business or resolve an IT issue. This is a key reason to be an AR and part of a good network.

The commercials of being in a network must also work for an AR’s business. Key things to establish include whether the commission rates are favourable and top tier. What about the fees the AR pays? Are these transparent and do they represent value for money? Will the network pay on time and will the accompanying remittance notices be clear and easy to understand?

While proc fees for an AR in a good network tend to be higher than those for many DAs, the real differentiator is around how much a network provides the AR with extra support, including helping them to achieve their goals.

This can be done in many ways but the key things that an AR should benefit from are workshops and business forums, plus events with education at the core and where the exchange of ideas and best practice are the norm.

ARs should also expect support from experienced regional sales directors, who can come into their office and offer practical help with business planning.

Many enhanced benefits will come as a result of a network’s reputation, strength and scale as well as the wealth of experience within the team. This provides a culture for ARs where they know they can flourish and feel supported and valued at the same time. I am not sure if this exists within the DA model.



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  • Post a comment
  • Peter Turner 10th October 2015 at 10:16 pm

    “The risk of future liabilities from advised mortgage sales having to rest with the DA is a major threat that prompts thousands of brokers to remain as ARs under the protective umbrella of a network.”

    Perhaps – but most networks will require a personal guarantee from directors of an AR so you will retain a personal liability for life. Set up as a limited company that is DA and you can simply close it down when you retire.

    Also, if you do get a complaint then as an AR you will get no free cases at FOS.

  • Chris Hulme 7th October 2015 at 1:30 pm

    Toni Smith hits the nail on the head here. The network function is far greater in its remit than in the past, it is no longer simply a compliance home to access lenders and products it goes far beyond this in terms of Competency, Quality, Support and Comfort. The network model brings peer to peer sharing of ideas and skills together for the common good. These are all things we value highly in our relationship with the network, and yes, its a relationship – we all get better together!


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