Clients of advisers paying £170 a year for regulation

Adviser trade association the Association of Professional Advisers (APFA) has suggested that financial advisory firms are being forced to pass on soaring regulatory costs to their clients.

APFA has published results of research which suggests that the UK’s financial advisers are collectively paying around £460 million each year towards the costs of regulation. This is said to equate to approximately £170 per client, based on there being 22,000 financial advisers in the UK who each have an average of 125 active clients.

APFA surveyed 74 firms between March and May 2014.

It appears that the smaller the firm, the greater the share of revenue that is spent on regulation. For firms with annual income of up to £1 million, an average of 12% of revenue is spent on regulation, while for those with income between £100,000 and £250,000 the equivalent figure was 19%. When we look at those with annual income of £100,000 or below, the figure rises again to 20%.

Those in the first category (up to £1 million) were said to represent 90% of firms surveyed. Here the 12% figure is made up of 3% on fees and levies and 9% on other costs. Spending on compliance was said to be 5% of revenue on average.

Common issues cited by respondents included the time it takes to review all of the regulatory policy documents and other papers, the costs of professional indemnity insurance and the complexity of required data returns.

The costs of regulation borne by a firm might include:

  • Fees to apply for authorisation with the Financial Conduct Authority (FCA), and to remain authorised in future years
  • Levies to fund the Financial Ombudsman Service, Financial Services Compensation Scheme and Money Advice Service
  • Salaries of internal compliance staff
  • Fees for the services of external compliance consultants
  • Training costs
  • Examination fees for staff sitting professional qualifications
  • Professional indemnity insurance premiums

APFA Director General Chris Hannant commented on the research findings by saying:

“As individuals face greater responsibility for managing their financial affairs, they will need affordable advice. It needs to be easier for advisers to operate and serve their clients. This isn’t about compromising on standards, this is about cutting the burden of compliance and the cost to clients.”

Mr Hannant says that APFA has written to the FCA with its findings. He went on to suggest some steps that could be taken to reduce costs, by saying:

“[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][The FCA] should find a way of streamlining the data it asks advisers to provide, and give them more time to provide it. It needs to simplify and consolidate the sheer amount of information advisers have to get through in order to be compliant, via the handbook, seminars and elsewhere. We also need to see clear action on introducing a long stop, to help reduce the cost of PI insurance.”

Striking the right balance is always tough in a matter such as this. For most advisory firms, their main (if not only) source of revenue will be the advice fees paid to them by clients, so the only way to recoup the costs of regulation would be to increase these fees. Yet without a robust regulatory system, clients have no protection against poor advice and unscrupulous practices that some advisers might employ.

In January 2014, Treasury Select Committee chairman Andrew Tyrie MP challenged financial advisers to produce reliable evidence on the subject of the costs of regulation, which could then be presented to the FCA.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]


Adviser trade body criticises proposed credit authorisation fees for financial advisers

Adviser trade association the Association of Professional Advisers (APFA) has said it believes that the consumer credit authorisation fee to be charged to financial advisers by the Financial Conduct Authority (FCA) is unjustified.

Clarification has recently been issued to investment advisers as to whether they require consumer credit permissions from the regulator. It has been known for some time that any firm that offers the option for a customer to pay an advice fee in four or more instalments would require this permission. More recently, it has been confirmed that any advisory firm who gives advice to a customer on one or more specific debts also requires credit permissions. An investment adviser might be expected to recommend that a customer pays off a particular debt before considering investing a lump sum, and doing so is deemed to be ‘debt counselling’.

The FCA now proposes to charge advisory firms an authorisation fee of £300 for this consumer credit permission. However, APFA has questioned whether this is an appropriate charge, given that the additional regulatory burden placed on the FCA by the change in the firms’ permissions will be negligible, and that these firms will receive no revenue from credit activities. APFA says in its paper: “It is therefore difficult to know what regulatory costs a £300 annual fee is intended to cover,” and goes on to suggest that a much reduced charge of £25 or £50 would be more appropriate.

APFA also highlighted the issue of firms with this permission needing to pay a larger levy to fund the Financial Ombudsman Service. The Association believes this is unnecessary given that consumer credit complaints against investment advisers are “extremely unlikely.”

APFA Director General Chris Hannant commented:

“We … do not believe that the £300 consumer credit fee proposed by the FCA is justified when the vast majority of adviser firms are only obtaining consumer credit authorisation to ensure they do not fall foul of the unclear rules. We urge the FCA to significantly reduce this charge.”

Mr Hannant also added:

“We are also disappointed that the FCA is not continuing with its fundamental fees methodology review.”

This refers to the fact that APFA has for some time called for a wide-ranging review of the authorisation fees system, to reflect their belief that financial advisory firms present a much lower risk to the regulatory system than other types of regulated firm.

However, APFA did welcome the changes made by the FCA to the fee structure for firms in blocks A12 and A13, which respectively encompass advisory firms that hold client money and those who do not; and to the arrangements for funding the Money Advice Service, and said firms’ costs should reduce as a result.