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Nic Cicutti: Advisers have their peers to blame for high regulatory costs

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A few years ago, a friend decided he wanted to take part in the annual Lambretta club riding championship and asked me to be his “tailgunner”, keeping him company on some 25 rallies the length and breadth of the UK and abroad.

Because this competition consumes almost every weekend for six months, not to mention many Fridays and occasional Mondays, before I agreed to my friend’s request I asked my then employer for the necessary time off.

I also mentioned my proposed involvement in this competition to a financial adviser – and fellow-scooterist. He laughed: “If you were an IFA there would be no need to ask anyone for permission, you just re-arrange your work so that you don’t see clients on the day you take off.

“In fact, I don’t know many advisers who bother to work on a Friday afternoon. Half of them are on the golf course, the other half are starting their weekends early. You won’t see them back in the office until 10am on Monday.”

Times have probably changed over the past decade and I am sure advisers have a different approach to time off. Those I speak to now say they are having to work harder and harder to justify the fees they charge clients.

Certainly, the growing use of modern communication technology means the distinction between work and leisure is blurred for many IFAs.

Not only do clients feel no qualms about contacting you at weekends but, as I have discovered, advisers often email me on a Saturday or a Sunday to make points about issues that presumably can’t wait until Monday. Clearly, some have no home lives to speak of.

Adviser incomes

What is not clear to me is the impact all this is having on IFA incomes. Over the past few days I have been trying to find out what the most recent surveys are saying about annual revenue for IFA firms and, after all costs including regulatory ones, what that translates into as an equivalent annual wage.

The problem is that there do not appear to be consistent annual surveys although some companies will ask a handful of questions as part of wider body of research, for example, the latest Aviva Adviser Barometer findings quoted in last week’s Money Marketing.

Some time ago, I vaguely remember a survey suggesting that the average income of an IFA was £60,00 to £65,000, with another survey saying a firm’s average annual turnover was in the £165,000 range, or thereabouts.

This would appear to tally with other reports I’ve read about the cost of employing paraplanners and other admin staff, paying for an office and leaving a large chunk for regulatory fees.

 But what proportion of this turnover goes in regulatory fees? Here, any potential answer appears to be far murkier. Last week’s Money Marketing published the Adviser Barometer responses and if  you believe the replies, almost two-thirds of advisers estimate their costs to be over 10 per cent of turnover. This was spread between one third who said it was between 10 and 14 per cent, about one in six IFAs who said it was between 15 per cent and 19 per cent of turnover; one in 10 said it was between 20 per cent and 24 per cent; and a further 6 per cent put the figure at a quarter of turnover or more.

The problem with this set of responses is that it simply cannot tally with any single and commonly agreed definition of “regulatory costs”.

Since the introduction of regulatory fees linked to turnover, the likelihood of disproportionate costs being levied on firms with high RI numbers but lower “sales productivity” has abated significantly. Plus, the average turnover quoted in the barometer research is not £165,000 but £250,000.

The only way this wide variation in figures makes sense to me is if IFAs are lumping everything into “regulatory costs”, including not just the FCA fees themselves but PI, training and CPD, compliance, FSCS and so on. If so, that can’t be the right way of looking at things.

Moreover, how can an effective comparison be made between the regulatory costs faced by solicitors and IFAs without knowing either the differences in the client base, the type of advice given or the products recommended?

Up to £150m of losses

Let’s be brutally honest here – what was the proportion of losses incurred through independent advisers involved in recommending Arch cru and Keydata products compared with solicitors?

Huge losses, mostly incurred through poor advice from IFAs: if anything should tell us why the regulatory bill for solicitors is so much lower, just look at these recent two misselling scandals – and then add in all the others over the past two decades. The irony is that, leaving aside some of the exaggerated lumping together bills that have nothing to do with regulation, the majority of compliant advisers are indeed paying a heavy burden to be under FCA scrutiny.

But it is one that has been foisted on them not by the regulator but by their so-called industry peers’ persistently poor advice. The sooner advisers focus their attention on who is really to blame for the large fees they pay, the sooner the bills will really start to come down.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 18 comments at the moment, we would love to hear your opinion too.

  1. Julian Stevens 8th May 2014 at 9:31 am

    Yes, but the bottom line is that IFA’s account for less than 1% of all complaints yet all of us are subject to regulation according to the lowest common denominator, which is clearly out of kilter with the requirements of the Statutory Code of Practice for Regulators, the expectation of which is that “as regulators integrate the Code’s standards into their regulatory culture and processes, they will become more efficient and effective in their work. They will be able to use their resources in a way that gets the most value out of the effort that they make, whilst delivering significant benefits to low risk and compliant businesses through better focussed inspection activity, increased use of advice for businesses, and lower compliance costs.” Plainly that isn’t the way things currently work.

  2. Nothing to write about so you went fishing instead Nic?

  3. Nic in this instance I think that you have missed a few points.

    With regard to adviser hours, I know I’m not alone. I have been in this industry now for over 25 years, before that I was in industry. I have never had Friday afternoons off and it is a rarity that I have worked less than 60 hours per week over all my working life – even when I was in Graduate Training. I have a home & social life, but mostly business comes first. I repeat I know I am not unique, but I will concede that I regard a good number of my peers as lazy buggers.

    When it comes to incomes, this too is a facile analysis. Who cares whether you earn £160k or £260k – what counts is what you actually have left after overheads and expenses. What is the point of earning £250k with an expensive office in the city, a clutch of paraplanners, a receptionist and a couple of secretaries – all costing £190k. I’d rather make £120k with £20k costs.

    Then we come to regulatory costs. Yes you do make a couple of fair points, but PII is a regulatory requirement (blackmail actually – as if you claim, you can’t actually get cover thereafter!). But I also know that regulatory costs are far higher if you are in a Network. Indeed if you employ a Compliance Consultant that too is a regulatory cost and will make your outlay considerably larger than those who don’t.

    Finally I do think you were a little unfair with regard to Key Data – after all this failed as a result of a criminal act. We will never really know what would have been the result if Mr Elias hadn’t filched a fortune and Mr Ford didn’t have his (offshore trust) fist in the till. That it was classified as an adviser rather than a product provider was another calumny.

  4. Michael Keech 8th May 2014 at 12:36 pm

    Why bother replying to this deluded hate IFA obsessed xxxx.

  5. Michael Keech | 8 May 2014 12:36 pm

    Why bother replying to this deluded hate IFA obsessed xxxx.

    I totally agree.

    Every time Nic Cicutti writes about advisers/IFA’s it’s always from the point of trying to throw negativity around, or bad light our way. There has to be something in his past life which set him on this road? Was he diddled of his last fiver by someone claiming to be an IFA in the past or did he fail the FPC 1 exam by one mark and has been damaged ever since?

    Whatever it is; there’s no doubt this is his life mission now and the only way to starve him of oxygen is to ignore him.

  6. Crip on shoulder comes to mind!!!

    You must have written this down the pub on a Friday afternoon after having to many.

    I do not know about others working as an IFA but I work a 60 hour week on average.

    I think you have to much time on your hands Nic and I wish Money Marketing would stop asking you to write rubbish like this as you have no idea of the work load of IFAs!

  7. Why do we always drag out the complaint percentages. Having worked in the IFA sector, many complaints are never recorded as such on RMAR returns unless the client decides to take it further.

    Life offices and banks have far more robust procedures which identify complaints and record them properly. I wonder if you read the true definition of a complaint (reproduced below) and ask yourself hand on heart how many complaints you have truly had, whether the numbers would change.

    any oral or written expression of dissatisfaction, whether justified or not, from, or on behalf of, a person about the provision of, or failure to provide, a financial service or a redress determination, which:
    (a) alleges that the complainant has suffered (or may suffer) financial loss, material distress or material inconvenience; and
    (b) relates to an activity of that respondent, or of any other respondent with whom that respondent has some connection in marketing or providing financial services or products, which comes under the jurisdiction of the Financial Ombudsman Service.

  8. I would suggest Nic that you do not have a clue what regulatory costs are. If it is simply PII or FCA levies and fees then we can quantify that at 5.4% of our turnover. But this is not the main regulatory cost. The main cost are all the other things that the regulator expects us to do and the size of our Compliance Manual is a clue!
    We are expected to develop and maintain policies for anti-money laundering, whistle blowing, financial crime, anti-bribery, data protection, customer data security, conflicts of interest, gifts and inducements. Then we must add the costs of staff training as well as structured CPD to the costs of the on-going monitoring of these policies. Then we must not forget the Compliance and T&C Plans, the Operational Risk Assessments, preparation for the Annual Audit, the TCF and MI Plans.
    Then what about the necessary due diligence on suppliers and platforms or ensuring recruitment is carried out according to … procedures. The cost of RDR was and continues to be huge and likewise the IT infrastructure to support it. 150Mbytes of data to support a simple portfolio rebalancing has to be prepared and stored somewhere.
    Then you have the costs of disjointed regulation – anyone who does a GABRIEL and a FSCS Fee Data Return knows what I mean. Product focussed regulation on pure protection, RIPs, life and pensions, investments – all too complicated and ignoring the concept of advice as the regulator sucks up to the EU. Complex rules too on VAT and adviser charging which no-one understands.
    And what about the cost and limitations of capital adequacy?
    I have mention training and competence but what about on-going supervision, documented team meetings to prove TCF, assessing the impact of the FCA’s Retail Conduct Review (ongoing), demonstrating and evidencing independence? All hugely time consuming. Then we have the excessive sales process itself which is so costly.
    And a senior manager has to take responsibility for all of this – one who could instead be charging clients £175 per hour. One that actually keeps a timesheet of the hours worked found that “compliance” alone represented 19% of her time or 380 hours a year – ignoring the regulatory requirements when she actual does work on behalf of clients.
    And if you say this is OTT, what Nic do you miss out? And I’ll quote you when the FCA come visiting

  9. “advisers often email me on a Saturday or a Sunday to make points about issues that presumably can’t wait until Monday. Clearly, some have no home lives to speak of.”

    Well I guess it depends on how far up the noses of these advisers you managed to get, Nic. Judging from the response so far this week this is an effort that borders on the spectacular. This could get you some calls at 2.00 am sunday morning in fact. I think many of use the weekends to catch up with the less pressing things in life, such as exchanging vituperative comment with you.

  10. Well said Sam !!
    And Rory Percival states we over complicate things ? I think not !!
    We have to cover ourselves, and adapt to the FCA changing the goal posts at any given opportunity.

  11. Something simple like CPD. No longer is it a case of turn up at a local event, collect your certificate etc. It has to be structured CPD, to maintain independence it requires you to refresh your knowledge on products you do not normally advise on – like ETFs, VCTs. So you have to travel further, do more research to identify what is appropriate CPD and then when you come back write down the benefit to you and how it achieves your CPD objectives. It takes more time and effort than ever before.
    One small example, multiply this with everything else that has been elongated and complicated by regulation and the obsession that if it is not documented in the prescribed format then it does not comply.
    Consider yesterday – platform due diligence. The questions that are being asked like why this platform, how do you determine cost and benefit to client boils down to having documented due diligence regularly updated.
    Independence – it took a Chartered adviser a whole day to draw up a RIP panel of products suitable for our clients. OK it is done but it still requires regular reviewing by same adviser and discussion with others. It takes time.
    FCA changed a telephone number the other month – one digit (whistleblowing). We spent an hour faffing around with that!
    Nic, our peers our costing us but not all the 5.4%. Regulation is costing us and our clients four, five or six times more than our peers – and stymying innovation.

  12. Edward Gibson 9th May 2014 at 11:05 am

    I am so disappointed by many of these responses.

    How can due diligence on a provider or platform be a regulatory cost? It is good business sense and the thought that without “regulation” advisers would not do it is scary.

    CPD – of what use is turning up to collect an attendance certificate? Again, the thought that advisers still think in those terms of something which is meant to improve what they do and ensure they remain up to date with changes and indeed to develop what they can do as a business – disappointing.

    How can supervision, management responsibilities and team meetings be regulatory costs? That’s called running a business. As is having to deal with VAT – HMRC are responsible for VAT and the rules are complex in loads of areas – most businesses have to deal with the complexities of VAT because that’s part of being in business and selling products and services. As is having PI and other insurances – try running an asbestos removal company – and of course you can continue to get cover after a complaint – what a silly comment.

    The problem is that the odd valid point gets lost in the “infamy, infamy, they’ve all got it in for me” that makes up the majority of the responses.

  13. @ Edward Gibson

    I agree with you it is good business sense, and would say, one that most if not all IFA’s do

    However where this does become a regulatory cost is the mountain of paperwork and time to collate this should the regulator come calling and as Sam has pointed out in detail.

    If you think about this; I MOT my car every year at my expense, and if I were to be pulled over by the old bill, if they had a mind to I bet they would find something wrong with it and proceed with a heavy fine.

    Bit like FCA then ?
    Maybe we are just used to being ruled by fear, and no I don’t think I am being over dramatic !
    Read Rory Percival’s view on the matter, wouldn’t trust him as far as I could throw him

    PS
    @ MM can you get the comment section on this web site sorted ?

  14. VAT is an issue because unlike general businesses it is peculiar to Adviser firms and no-one really understands it including HMRC, accountants, tax advisers and FCA. Guidance is only forthcoming at expensive tribunals!
    As for due diligence, the necessary diligence for a firm with one adviser appears to be the same as if you had fifty of them where you can cover the cost overhead more easily. There is no proportionality – and if there is no-one at the FCA is defining it. I agree that you need due diligence as part of running a firm but not in the heavy over the top way that is communicated to us by the FCA. It should be something recorded in managers minutes such as “following a presentation from Mrs C, management discussed the pros and cons of whatever and it was agreed that on the basis of this and that the firm would ……. etc. That should suffice. Platform due diligence is a nightmare and the parameters keep changing – if it was that simple everyone would use the same platform!
    As a small firm we are conducting due diligence at present reading and testing a lot of things and dumping the information in a Windows folder with the results sifted and processed by that most efficient of computers – the human brain which in a small firm where the span of control is great and experience abounds should be sufficient. Nevertheless if the FCA came around they would ask where the documented results were together with your conclusion. Like with the fact find, the FCA expects evidence to be in one place where they can easily find it. If it is not there, you are non compliant.

  15. Edward Gibson 9th May 2014 at 2:17 pm

    VAT is not peculiar to adviser firms and as part of an accountancy practice which includes VAT consultancy I can tel you that advisers are not the most complex of clients when it comes to VAT. The issue is that VAT has been ignored for decades because of the old mantra of “commission isn’t, fees are” which was never correct.

    and why should due diligence be any different for a one adviser firm than a 50 adviser firm? The issue on DD is not how many advisers the adviser firm but the individual provider or platform which the individual adviser is considering using for that individual client. If you advised a client on the back of a chat following a presentation from a provider or platform salesperson just because you are a small firm then that is the sort of due diligence which leads to the next FSCS claim.

  16. I can only assume Edward you are a regulator because you do not have a clue. Like Nic you appear to think that the FCA are necessary force. What do you think we are doing during the day the two of us – we spend all day discussing TCF, conducting due diligence but despite this we are expected to document it so that the FCA can do their simple remote checking. Box ticking. We have had no complaints, avoided Arch Cru and Keydata because we were unhappy with them. We did the due diligence but we never documented it. We just did not use them because there was something wrong.
    CPD – we spend ages ensuring we use appropriate CPD yet in spite of doing it very well and conscientiously we still spend more time than previously documenting it. It is a small and simple example of how work is elongated. And for whose benefit? VAT – we give advice and that is the problem, differentiating between advice and intermediary services. Other firms are not getting it right and all though we try desperately to play it straight we are at a disadvantage because the FCA and HMRC have made it difficult and fail to give clear guidance.
    The FCA are very quick to give rules but the lack of proportional guidance to small firms in particular is another frustration – just so the FCA do not get hung up by possible negligence claims in the future whereby the adviser says the FCA said this.
    And the fact that you cannot understand why 15 advisers or 1 adviser makes a difference – God help us. You can apportion regulatory costs including TCF, RCR, Due Diligence, Financial Reporting, Regulatory Returns across 15 individuals “sales” rather than one.

  17. Edward Gibson 13th May 2014 at 8:18 am

    Sam, the point about 1 versus 15 advisers was that the due diligence on a platform and a provider should be as robust if there is 1 adviser as if there were 15. Nothing to do with cost sharing but to do with doing a proper job and doing it right. I run a business and I keep a very close eye on my costs but due diligence is a crucial part of providing proper advice and services to our clients and no way would I ever consider that it might be a good idea to do less just because we are 2 advisers rather than 15 and cry foul that I have to do as much as any larger firm before being confident in using a particular provider or product for a client. Due diligence is worthless if not documented. It becomes a chat.

    To be clearer on the VAT point – the FCA have nothing to do with VAT. You cannot pin that on the FCA no matter how much you dislike them. VAT is down to HMRC and I agree it isn’t crystal clear but that is not specific to our sector. It isn’t us that they have it in for. If you claim that all you do is give advice though the answer is simple – add VAT.

  18. Like Sam Caunt, I am pulling my hair out documenting and recording RUBBISH. Having completed our annual accountant with our accountants (my trial balance and P&L) was pretty much DONE before I even passed the figures to my accountant, but we then have to get the figures in to a format that goes on the Gabrielle reports, we THEN have to apportion the same money i to different categorizes once again on the RMA-K (i.e.product provider and platform go seperately, initial fee and ongoing fee) we then have different treatment of life and CIC for FOS and FSCS figures in the RMA – J and so on. Even IF my admin have keyed everything under the right headings so we can extract the data from our back office system I can’t even remember which screen I’m supposed to be keying what rubbish in to! I currently feel I’d rather go off and slit my wrists than spend anymore time on this……
    If we don’t do it on time, they fine us, if we do it wrong, despite the fact under the helptext for RMA-J which in itself is 3 1/2 pages of A4, it says at the end “the FCA is looking for firms to make their best efforts to estimate the split” they then go on to state “the methodology should be subjective, for example based on random sampling of invoices or random stratified sampling…… “the firm must on request be able to provide an audit trail which demonstrates………..”

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