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Small firms face paying high price for success

The FSA&#39s plans to move to a new fee structure for IFAs based on income rather than the number of RIs in a firm could hit successful smaller firms with high turnover.

In a document circulated to trade bodies and seen by Money Marketing last week, the FSA says by 2005 it is aiming to change the tariff base for fee blocks from approved persons to an income-based measure for firms advising on investments.

It is a move that the FSA seems to have been contemplating for some time. It has already announced that mortgage and general insurance intermediaries will be charged in income-based fee blocks and its decision to drop the RI approach for investments has been defended as delivering a “consistent method of charging across all these types of business”.

In a letter to trade bodies, pre-empting a January consultation paper on fees, FSA revenue department manager Jeremy Heales says many firms which carry out investment activity will also be advising on mortgages and general insurance so the FSA has decided to have a single method of charging for all firms.

Heales says a suitable tariff base will be constructed during 2004.A chapter in January&#39s consultation paper will be dedicated to the practicalities of the income-based tariff structure.

But many in the industry are concerned that the language used in the document circulated last week suggests that the FSA has already decided to push ahead with an income-based model without consulting the industry.

They argue that any consultation will be concerned with the nuts and bolts rather than the basic validity of the proposal.

Sofa managing director Brian Lawless says he understands why the FSA feels the need to move to a common fee structure but he cannot see why it seems to have decided to move straight to an income-based model. He says: “This would inevitably lead to higher fees for small, profitable firms. Changing the fees in this way will look like a back-door ruse for raising fees.”

Lawless says Sofa will be calling on the FSA reassess the move completely. He believes it would be more sensible to start with a mixture of an approved persons and income-based fee structure to reduce the amount of payment distortion that would come from a complete move from one system to the other.

He also questions whether the move will make any difference to the administration of fees.

He says: “I am not convinced that a move to an income-based system would make any difference to the administration of fees. If anything, it would tend to be more complex, with various accounting systems and firms&#39 reluctance to pass on sensitive information like this.”

FSA spokesman Robin Gordon-Walker points out that this pre-consultation communication is only setting out the issues surrounding a change from the approved person method of determining fees and that the proposal has not yet been formally formulated.

He says: “We are still looking at the pros and cons of moving to the income-based model. Increases would depend on how income is assessed and we will try not to have too much distortion.”

Gordon-Walker says once the consultation paper is published in January, the industry will have plenty of time to comment on any changes to the fees structure. But even though he insists that the change is not yet a done deal, it seems clear from the circular that the FSA is leaning strongly in favour of a fee system based only on income.

Gordon-Walker says: “The fee blocks as they stand were always meant to carry us through to a particular period and were always going to be reviewed. A new fee structure is scheduled to be put in place by April 2005 but there is a lot of fees water to go under the bridge before then.”

Apart from concerns over fee hikes for some firms, some question the essential fairness and philosophy behind the change. London-based IFA Advisory & Brokerage Services chief executive Gareth Marr feels that a change from the approved person model to income criteria does not fit with the new risk-based philosophy at the FSA.

He says: “The FSA has positioned itself as a risk-based regulator. But in terms of risk, a key determiner is the advice each RI gives their clients. So the amount of RIs you have is a good way to determine risk. It is people who make mistakes, not numbers.”

However, Master Adviser managing director Doug Brodie believes it is entirely relevant to base fees on income. He says: “It is much more relevant to match fees with what is in effect the potential liabilities. The offenders with the biggest liabilities are the bigger firms.”

But Brodie is not convinced that the move will not mean increased fees. He says: “Regulation costs are the second-highest charge for my business, second only to office costs in Covent Garden. It is even higher than staff costs.”

Brodie passes the cost of regulation straight on to the client and he has started showing the costs on his bills.

He says: “My clients are astounded at the cost of regulation. These people are voters and they will not stand for increasing costs from the regulator if they seem extraordinary and unnecessary.”

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