Regulatory costs in all their guises cost financial advisers an estimated £475m last year, according to Apfa. That figure is set to rise again once the full numbers are in for 2015, not least because of the dramatic hike in the Financial Services Compensation Scheme levy for IFAs.
The latest FSCS bill for my firm has now soared well past the £100,000 mark – a big chunk of unplanned spending for any business to stomach. That is money that could be better used to serve our clients. It could more than cover the salary and associated costs of employing two extra technical assistants, for example.
The latest hike in FSCS levies has been prompted by claims arising from Sipps: in particular, unsuitable and unregulated investments within them. One issue has been the contentious way in which some advisers and Sipp providers have found themselves being held responsible for DIY investment decisions taken by a client but “enabled” by the provision of the Sipp. To my mind, this is akin to suing Ford because a driver zooms through a 30mph limit at 60mph in his Ford Focus.
But regardless of the rights or wrongs of these claims, they have again highlighted the flaws of the current “pay as you go” system. It leads to lumpy and unpredictable costs. In some cases, firms that have never even advised any Sipp clients will be left struggling to find the cash to pay for the mistakes of others.
To his credit, FSCS chief executive Mark Neale acknowledges the problems with today’s levy system. I was at the Money Marketing Brave New World retirement conference in London last month when Neale spoke on the issue. “We get that firms find it difficult to absorb these unpredictable calls for funding and find it hard to pass those costs on,” he said.
So, in response, the 2016 FSCS funding review is going to consider different ways to structure the levy, including, intriguingly, a switch to “risk-based pricing”. A risk-based levy might, for example, take more account of a firm’s professional indemnity insurance. Those firms that paid higher premiums to buy insurance with a lower excess might end up with a smaller levy. Another approach would be to look in more detail at the mix of business an IFA writes. A firm with high levels of contentious business would face a higher levy.
It is good to see fresh thinking, although the Q&A session with Neale at the conference very quickly revealed the challenges in a new approach. How do you define risky business? And how do you keep track of who is writing what business in a way that makes the levy an accurate reflection of their current advice mix? The FSCS acknowledges it does not have that level of “granular detail” at the moment.
For me, the big win with a risk-based levy might be a switch to a system where regulators have to collect far more timely information about the advice being given. If they did, they might have a better chance of nipping emerging issues in the bud before any poor advice grows to become a multi-million pound claim.
That is surely better than today’s approach, which can unfortunately let a problem fester before then running an expensive whip-round to deal with the consequences.
Stephen Womack is a chartered financial planner with David Williams IFA