As part of its campaign to highlight the rising cost of regulation, one of the major financial advice trade associations has revealed that some smaller firms are seeing more than one quarter of their turnover disappear in regulatory costs.

The Association of Professional Financial Advisers (APFA) surveyed almost 400 firms and found that the average firm spent 12% of its turnover on regulation in 2014. It is estimated that the industry’s total regulatory bill for the year was £475 million, up from £460 million in 2013, and that the average client pays £160 in fees towards a firm’s regulatory bill.

APFA is even encouraging its members to disclose this £160 average cost to their clients, in the form of a disclosure statement which ends with the following:

“For the 2014/2015 period the Association of Professional Financial Advisers (APFA) has estimated, across the profession, that the cost to each client for the regulatory costs that a firm like ours incurs is £160.”

The research found that firms with turnover of less than £100,000 are forced to spend an average of 28% of their turnover on regulation.

The Association hopes that its findings will influence the Financial Conduct Authority (FCA) and the Treasury as they pursue the Financial Advice Market Review (FAMR), a wide-ranging review of access to financial advice. The Treasury has already promised that the Review will “facilitate the establishment of a broad based market for the provision of financial advice to all consumers.” At present, firms inevitably have to pass on the costs of regulation to their customers in the form of higher fees, and some consumers may be priced out of financial advice as a result.

APFA director general Chris Hannant commented:

“Based on advice firm responses, our research shows that each client is still paying hundreds of pounds every year to cover the cost of regulation. At a time of heightened policymaker concern about what measures are required to broaden consumer access to professional financial help, it is vital that radical steps are taken to reduce costs and make advice more affordable to those who need it.

“APFA will continue to urge politicians and regulators to use the FAMR as an opportunity for reform. Advisers can be more proactive and transparent in highlighting how much of their bill is simply to cover regulatory costs.”

Examples of regulatory costs incurred by firms include:

• Authorisation fees to their regulator, the FCA – these rose by an average of 8%, and by up to 11% for some firms, in the most recent financial year
• Salaries of staff and/or fees to external consultants who manage their internal compliance;
• Training costs to ensure advisers maintain competence
• Examination fees for staff sitting professional qualifications
• Levies to fund the Financial Ombudsman Service, the Pension Wise guidance service, the Money Advice Service and the Financial Services Compensation Scheme – the last in particular has risen significantly in recent years
• Professional indemnity insurance premiums
• The time spent reviewing regulatory documents, such as rule changes, policy documents and consultation papers

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.