The lead up to the EU referendum saw an awful lot of scaremongering from both sides. Among the Remain supporters were the large banks, insurance companies, asset managers and payment services providers, all who could potentially lose out as a result of Britain’s decision to Brexit. Smaller firms such as financial planners, however, do not have branches in the EU and rarely have EU resident clients, so may be less affected by the decision.
Almost all of Britain’s financial services rules are derived from EU law. The problem is that the EU’s financial services sector is dominated by large banks because advisers are virtually unheard of outside of Britain. The consequence of this is that IFAs are regulated by rules designed for larger banks not smaller advice firms.
UK financial services is one of our great success stories. We have a trading surplus with the rest of the world of £20bn a year in financial services, which translates to 1 per cent of our GDP. IFAs continue to control more than 50 per cent of retail funds under management. Financial intermediation is a tremendous benefit to UK investors because it results in greater competition, innovation and lower charges.
Meanwhile, complaints against IFAs constitute just 2 per cent of all complaints each year, with only one in three upheld by the Financial Ombudsman Service. With all of these clear benefits, you would think the FCA would want to support the role of the IFA. But think again.
The regulatory problems for IFAs are numerous but let me just mention a few:
- Increased bureaucracy
- FSCS funding
- Regulatory costs
- Professional indemnity insurance
- Lack of a long stop
- Stifling of business writing
Without a shadow of a doubt, the FCA creates a huge amount of bureaucracy for firms. This is very time consuming, results in higher costs and diverts advisers’ time away from the most important task of advising clients.
Meanwhile, the Financial Services Compensation Scheme funding is extremely unfair. I do not know of any other profession or industry in which the good guys compensate the clients of the bad guys. And regulatory costs keep rising, not just because the FCA’s and FSCS fees keep increasing but also because of the extra time costs of dealing with endless red tape.
Alongside this, the absence of a long stop, the FCA’s culture of encouraging various misselling complaints and the burden of excessive rules simply make it harder year on year for IFAs to get professional indemnity insurance on competitive terms, if at all.
The consequence of all of this is that IFAs get distracted from writing new business and become very risk averse with clients because of a culture of fear of the regulator. None of these problems result in optimum solutions for clients. Now we are no longer a member of the EU, we finally have the opportunity to reform financial services regulation for the good of the UK as a whole.
Tony Byrne is financial planning director at Wealth And Tax Management and author of Wealth Magic