The Association of Professional Financial Advisers (APFA), the principal trade association for financial advisory firms, has launched its survey into how much it costs to be regulated by the Financial Conduct Authority (FCA).
The recent focus on this area commenced in January 2014, when Treasury Select Committee chairman Andrew Tyrie MP challenged financial advisers to produce evidence on this subject, which could then be presented to the FCA, politicians and consumers.
In response, Retiring IFA, an organisation which assists financial advisers to find partner companies for mergers and acquisitions, surveyed 221 adviser firms and presented its results in February 2014. The survey found that, on average, firms spend 27.45% of their turnover on regulatory requirements – this is merely the share of turnover, and the amount by which profits reduce as a result of regulatory costs is even more significant.
Following the survey, Retiring IFA founder Stephen Hagues published an open letter to Mr Tyrie on his website, pointing out that regulatory costs are inevitably passed on to clients; and that many of the recent regulatory problems have been caused by the actions of product providers, and not by financial advisers. This last comment may be intended as a response to those who suggest that a reduction in regulatory requirements for financial services firms is not desirable given the amount of negative publicity surrounding the industry in recent years.
APFA director general Chris Hannant welcomed the work of Mr Hagues’ organisation at the time, but suggested that a more formal exercise was required. The APFA survey can be completed at www.apfa.net/costs-of-regulation. It asks questions about:
- Whether the firm is directly authorised or an appointed representative
- The number of employees, and specifically the number of compliance staff
- Total income from regulated activities
- Total levies paid to fund the Financial Ombudsman Service (FOS), Money Advice Service (MAS) and Financial Services Compensation Scheme (FSCS)
- FOS case fees paid
- Examples of other one-off regulatory costs
- Costs of internal and/or external compliance support and regulatory reporting
It is not necessary for the firm to be a member of APFA in order to complete the questionnaire.
Examples of regulatory costs incurred by firms include: authorisation fees to their regulator, the FCA; salaries to staff and/or fees to external consultants who manage their internal compliance; training costs to ensure advisers maintain competence; and levies to fund the FOS, MAS and FSCS. In addition, they must meet stringent requirements on capital adequacy.
The costs of regulation have been cited as one reason why it is difficult for new advisers to enter the industry. In January 2014, Mr Hagues referred to “owner-managed sole traders struggling to sustain profitability in an era where being an independent financial adviser is becoming less viable.”