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A mountain to climb: Research lays bare advisers’ regulatory costs burden

Research commissioned by Money Marketing has laid bare the extent of advisers’ regulatory cost burden as almost two-thirds of advisers estimate their costs to be over 10 per cent of their turnover.

Money Marketing submitted a number of questions, as part of Aviva’s latest Adviser Barometer research, which surveyed 1,500 advisers in total.

Asked what proportion of their turnover was spent on regulatory costs, and based on 1,200 responses, 34 per cent of advisers said they spent between 10 per cent and 14 per cent.

Meanwhile, 15 per cent of respondents put the figure at between 15 per cent and 19 per cent of turnover; 10 per cent said it was between 20 per cent and 24 per cent; and 6 per cent put the figure at 25 per cent or more.

About half of the firms questioned reported an average annual turnover of up to £249,000, with a further 20 per cent reporting turnover of between £250,000 and £500,000 and the remainder over £500,000.

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The survey represents the most comprehensive attempt to establish the cost of regulation to advisers since Treasury select committee chair Andrew Tyrie called on advisers to produce a “robust” figure for their total regulatory costs in order to better hold the regulator to account in an interview with Money Marketing in January.

Tyrie said that the profession needs to be more “vigorous” in demonstrating the true cost of FCA supervision.

In response to the findings of the recent research, Tyrie says: “This is an important piece of work. Based on these figures, the results of the survey are concerning. With such a high proportion of firms concluding that more than 10 per cent of their turnover is accounted for by regulatory costs, by implication that is more than 10 per cent of what we all pay as consumers for these services.”

Tyrie adds: “We do not need more regulation, or more costly regulation, but better-quality regulation. This survey shows it is not just the levy but the full compliance cost on firms, and therefore customers, which needs to be considered.”

Lobbying for change  

Apfa has been conducting its own “cost of regulation index” and finished collecting the data this week.

The trade body plans to use the results to push the FCA for a reduction in advisers’ regulatory costs.

Apfa director general Chris Hannant says the regulator must recognise that high regulatory costs increase the cost of providing advice.

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He says Apfa has gathered enough data to build a strong case.

When the FCA consulted on its 2014/15 annual budget in March, it estimated that over 31 per cent of its £446.4m budget would come from investment advisers, mortgage brokers and general insurance brokers.

Many advisers who do not pay the minimum £1,000 regulatory fee fall into the A13 fee block, which will pay a total of £68m in 2014/15.

Money Marketing revealed in November that an “anomaly” in the way different fee blocks interacted had resulted in A13 advisers being overcharged by £118m over the past five years. 

Asked about the profession’s efforts to quantify regulatory costs, and the numbers themselves, an FCA spokesman says: “This year, most advisers will have benefited from either a frozen levy fee or a substantial reduction.

“We know it is important to be transparent on the potential cost of bringing forward any new rules or guidance. We always seek to work closely with industry to ensure that the cost of regulation is proportionate.”  

Adviser versus solicitor costs

The Solicitors Regulation Authority charges firms a levy based on turnover and a set fee for each registered solicitor. For this calendar year, the fee per lawyer is £300 while the percentage fees paid by firms are tiered downwards as turnover increases. For example, a firm with fee revenues of £200,000 would pay £1,330 to the SRA, plus lawyer fees. A firm with turnover of £813,000 would pay just over £4,000.

The fees cover the SRA’s costs, those of the Legal Ombudsman and the Solicitors Disciplinary Tribunal, and activities by the Law Society.

FCA fees paid by advisers depend on a number of factors: regulatory permissions, whether a firm needs a consumer credit licence, annual and potentially interim levies from the Financial Services Compensation Scheme and levies towards the cost of the Financial Ombudsman Service and the Money Advice Service.  

The FCA’s latest estimates for average costs showed that A13 firms paid an average fee of £6,210.

Compliance

Trade body Sifa represents solicitors and advisers. Managing director Stuart Bushell says regulatory costs differ for the two professions. He says: “The cost of regulation for solicitors is definitely less [than for advisers] and I would probably go as far as to say it is about half.”

Bushell adds solicitors are much less likely to pay for external compliance support.

Recent research from the Institute of Financial Planning found that among its accredited firms just 12 per cent rely on internal resources alone for compliance.

Innovation

It appears that the cost of regulation is hampering market development. Last week, FCA technical specialist Rory Percival told delegates at a Distribution Technology event that the regulator did not want to stymie firms seeking to develop simplified versions of their advice proposition for lower-value clients.

A number of advisers told Percival they were keen to develop an online advice proposition but were afraid of the time and cost associated with complying with the regulator’s requirements.

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Aviva found that 14 per cent of those polled were keen to develop an online advice offering but were waiting on guidance from the regulator. Only 7 per cent were already offering an online proposition for lower-value clients. Overall, 34 per cent indicated a desire to offer online advice for low-end clients.

Aviva intermediary director Andy Beswick says: “Online is a really good way to give simplified advice or guidance for those who do not want or cannot afford full-fat advice. The question is, can it be done profitably and will the regulator allow it to be done profitably?”

The overall picture is clear: advisers are still very concerned about the cost of regulation.

Asked as part of the Aviva survey about their biggest concerns, 48 per cent of advisers highlighted regulatory fees and levies – more than for any other category.

That was closely followed by professional indemnity insurance costs, inextricably linked to regulatory costs because premiums and cover are dependent on the strength of a firm’s compliance.

With regulation eating into profits, it is no surprise that one of the biggest concerns for advisers right now is staying in the black.

Click on image to enlarge

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The fightback on regulatory costs 

October: FCA reveals an “anomaly” in A12 and A13 fee blocks which has seen it recover more from firms in the A13 block, despite A12 firms holding client money

November: Money Marketing calculates that advisers in the A13 fee block have been overcharged by £118m over five years

January: Treasury select committee chair Andrew Tyrie calls on advisers to supply a “robust” figure for total regulatory costs

February: Tyrie grills FCA chief executive Martin Wheatley during a TSC hearing and says there is a ”strong case” for the regulator to pay back the £118m in overcharged fees. Wheatley rejects this and says it is wrong to describe it as overcharging

March: Apfa launches a survey to try and quantify the cost of regulation and compliance for advisers

April: Aviva research, commissioned by Money Marketing, shows that almost two-thirds of advisers spend more than 10 per cent of their turnover on regulatory costs

ADVISER VIEW: Ian Thomas

Ian Thomas 2014

The trouble is, there are explicit regulatory costs and levies and indirect expenses such as the increased cost of PI cover. You also have the cost of external compliance support and management resource used to read lengthy documents. If you look at other professions, I think we have gone too far. Regulatory reporting is still very complicated. The volume of regulation turns people off the industry, which is not good when we are trying to close the advice gap.

Ian Thomas is director at Pilot Financial Planning

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Money Guidance CIC 1st May 2014 at 9:57 am

    Do these figures relate solely to direct financial costs, or do they attempt to capture the large opportunity costs associated with regulation and compliance as well?

  2. My real concern with the FCA is the cost in terms of stifling initiative and innovation and the slavish adherence to EU Law. It is fine and dandy looking at the costs of regulation at the output level but I suspect the real cost is to the economy as a whole

  3. The regulator says costs for advisers held steady this year. Fine, but they stole £118m. off us over the previous 5 years. Any chance of a claim here then ?

  4. Bring it on !! 1st May 2014 at 10:33 am

    I submitted data to this survey based on the actual monetary cost of regulators fees, PI, compliance consultants and FSCS/MAS levy.

    If I also worked out the cost in my time of complying / understanding the constantly changing rules & “guidance”, box ticking (for the latest FCA whim) and RMAR reporting the true overall cost based on “lost productive time” would probably double my firms actual cost.

  5. Dominic Thomas 1st May 2014 at 12:25 pm

    It’s good to open up this discussion with some better numbers for once, however they still seem somewhat flaky. I’ve not met an adviser that thinks the FSCS/FCA levy approach is fair, in that most of us seem to be bailing out all sort of firms when they mess up, including stockbrokers, which seems rather daft. This is something that others have raised and tried to push, trade bodies – Mr Bamford and so on. Frankly if enough people bothered to support initiatives, perhaps things would change.

    That said, you have to pay to play. The only actual hard costs are the regulatory fees and PI fees. Capital adequacy is an issue, but having financial reserves is good business (and personal) practice, whilst its a requirement, the thinking seems fairly sensible and the regulator has backed down on its flawed proposed formula linking with “fixed costs” for the time being.

    As for the 35 hours CDP, frankly if you cannot notch up 35 hours of learning about your field of “expertise” out of the 8,760 available you probably should shut up shop as you have no hope of keeping up to date. Anyone serious about developing skills that earn a living should be doing at least this amount each year.

    Firms don’t have to pay for compliance services or any software, but in 2014 you’d be either very brave or incredibly stupid not to. So I would still ascribe this to business management and operating costs. Any professional business that wants to compete and thrive has to invest in efficient technology and processes to provide a great service that people will pay for. If you really can’t be bothered to do this, please hand your client list in to someone that can. Sure some of it is overdone, but its your call on how much you churn out and if someone else is making such decisions that you don’t like, start your own firm, take the risk yourself and make your own decisions.

    Whilst the figures are of interest, I like the comparison to the SRA, which is at least comparable. However, knowing more of the context would be helpful. The SRA doesn’t have to regulate Fund Managers, Banks and so forth… the FCA do, and now have taken on everyone that offers debt advice, credit for a washing machine etc etc, So precisely how big a deal is the SRA market? do that do that much business, perhaps they are the one’s being fleeced rather than us?

    Of course like most people I don’t want to pay over the odds for compliance, but I think there is a tendency to confuse compliance with operating costs. PI is the biggest bug-bear for me as it seems as though the goalposts are moved each year, the premiums are commission driven and I have little real faith that its worthwhile or even vaguely value for money, but then I’m fortunate in that I haven’t had to test it out…

    What makes most of us peeved, is the huge efforts we go to de-risk our business by doing the job as to our best abilities, to protect ourselves, staff and clients only for some muppet (sorry Mr Henson) to sell some rubbish because he (invariably) liked the idea of 7% commission with “guaranteed returns of 25%” that blows up and we all have to collectively cough up for his and the clients “naivety” and then for us all to be lumped into the same category of greedy rip off merchants, that don’t give a fig about their clients. Whatever your historic views about compliance and regulation, it is precisely this scenario that the regulatory is trying to minimise, which we should embrace…. shouldn’t we?

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