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]