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Network fee hikes: N2 only an excuse?

There are tough times ahead for network members if the recent hikes in fees by DBS and Berkeley Independent Associates are the start of an industry trend.

Both networks are blaming the cost of being compliant with N2, which came into force on November 30. The fear among IFAs is that other networks will be forced to follow suit.

DBS managing director Alan Taylor says: “The N2 changes are the biggest regulatory shake-up since the 1986 Financial Services Act. IFAs are facing higher costs, reflecting investment in improvements to business processes and procedures to meet the new regulatory regime. The price changes mean DBS can announce many more benefits.”

DBS justifies the increased burden on members with its estimate that the cost of compliance has increased more than five-fold since 1996.

But the FSA says in some respects N2 is cutting the cost of compliance and some DBS and BIA members think the real reason may rest within the networks and the baggage they carry from the likes of pension misselling and the FSAVC review.

All DBS&#39s 3,000 registered individuals face a price hike, with the amount rising as the firm&#39s level of commission increases.

Members with a turnover of under £80,000 a year will see DBS&#39s commission share rise from 12.5 per cent to 15 per cent. Every firm will have to pay a new investment adviser fee of £100 per RI.

Some members are also angry that they are seemingly being punished for having more qualifications. Specialist pension IFAs with G60, K10 and K20 will have to pay a £250 quarterly licence fee.

Crossley Mackenzie partner Christopher Hind says: “This increase is a pay cut for next year for us. Everyone can accept some level of increase for increased compliance but N2 is a lame excuse for this level of price hike. It smells of Misys imposing its pricing structure on DBS.”

DBS&#39s move followed hard on the heels of the shock to BIA&#39s 550 RIs when it increased its fees with only one month&#39s notice.

It too is levying a minimum fee, set at £562.50 per firm. It is increasing its annual fee as a percentage of each firm&#39s income by 1 per cent and including renewal commission as well as initial commission and fees when calculating income.

In a letter to members explaining the changes, the network says: “Costs continue to rise and, in line with other networks, BIA needs to review its charging structure to meet you current and future demands and for increasing regulation. A recent example of this would be our exhaustive N2 preparation.”

But there is a possibility of BIA members staging a revolt through a legal challenge by law firm ProAct legal.

ProAct principal Gareth Fatchett says: “The increases are presented to each firm as what will occur rather than a proposal for acceptance or rejection. The basis of any contract is that where a fundamental variation occurs, the parties need to reach agreement.”

One BIA member says: “I am now considering leaving the network. It is not just the increase in fees but all the additional costs for the likes of getting promotions compliance checked.”

But in response to networks blaming N2 for the cost inc-reases, FSA spokesman Robin Gordon-Walker says its fee per RI is much the same as before N2 and over time its “lighter touch” approach could actually reduce costs.

The FSA concedes networks may have faced some increases in costs due to tasks as training staff to use new systems.

But it says smaller IFA firms should be able to reap cost benefits from being in a network because of its tapered price tariff which charges lower fees the larger the firm. Because networks are regarded as one firm, the network should be able to pass this lower cost on to members.

For example, a network with over 2,000 members, such as DBS, is treated by the FSA as a firm with 2,000 advisers and pays £137 per RI, while a firm with four RIs pays £200 per person.

But the FSA says there a threat to costs if the crosssubsidy from providers to IFAs to meet the cost of regulation is removed. It says this is beyond its control and whether or not the cross-subsidy stays in place is being debated by the ABI and Aifa.

Misys is also denying a charge levelled by some members that it has increased DBS&#39s costs to bring it into line with its other networks.

Misys spokesman Paul Charles says: “DBS was going to make the increases even if we had not bought them. Us buying them actually delayed the increase in costs if that is any solace to members.”

But other network heads have taken a more cynical view of the changes and claim they see no need to increase costs.

Tenet Group chief executive Simon Hudson says: “DBS seems to be coming into line with the rest of Misys. We have no plans to increase fees although there are inc-reased compliance costs in some ways.”

Bankhall director Tony Murrell says: “I do not believe it is necessary to raise charges and we have no intention of doing so in the near or distant future.”

Some industry commentators believe the older networks are raising charges as they are concerned with the extra baggage they are carrying from pension misselling and FSAVC reviews and the ongoing investigation into endowments.

But Aifa thinks some rises may be justified as the more desk-based approach to regulation means IFAs must have their paperwork up to date and there is more onus on compliance officers to get it right.

The debate is well under way on whether the price increases by DBS and BIA are justified but all network members should be asking their organisations if they are going to increase costs.


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