Retiring IFA, an organisation which assists financial advisers to find partner companies for mergers and acquisitions, has responded to the call from the Treasury Select Committee (TSC) to demonstrate the cost of being regulated.

In January 2014, TSC chairman Andrew Tyrie MP challenged financial advisers to produce “reliable figures” which could be presented to the Financial Conduct Authority (FCA), politicians and consumers.

Retiring IFA duly surveyed 221 adviser firms and presented the results in February 2014. Most of the firms were directly authorised as opposed to being members of networks. 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.

Retiring IFA founder Stephen Hagues has now written to Mr Tyrie, describing the costs as “shockingly high.” His open letter has been published on his personal website, and points out that regulatory costs are inevitably passed on to clients, forcing them to pay higher advice fees. He warns of the possible consequences if this issue is not addressed by saying: “If the treasury chooses (by abdication) to handicap the advice sector and allow a regulator to take over a quarter of business turnover (in addition to HMRC and local government levies) then it will kill the sector without giving the profession the opportunity to adapt to current market changes.” Mr Hagues also points out that many of the recent regulatory problems have been caused by the actions of product providers such as Keydata and Arch Cru, and not by financial advisers.

Chris Hannant, director general of the trade association the Association of Professional Financial Advisers, welcomed the report but suggested there was a need for a more scientific assessment of the costs incurred by his organisation’s members.

Advisers need to pay authorisation fees to their regulator, the FCA; salaries to staff and/or fees to external consultants to manage their internal compliance; training costs to ensure advisers maintain competence; and levies to fund the Financial Ombudsman Service, Money Advice Service and Financial Services Compensation Scheme. 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.”