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Why I am adding a new client charge for regulation


All business incurs costs but there comes a point when specific overheads either become disproportionate to the operation or, when created for the protection of the consumer, consideration has to be given to passing them on. Regulation and the related client protection has now crossed this barrier and firms must reconsider their charging terms to survive.

We are introducing a 2 per cent levy on all new subscriptions to cover the transactional risk following the hike in our Financial Services Compensation Scheme levy. This extra charge can be seen as an insurance premium. The retail distribution review is bringing significant changes to the advisory world. Not only will there be fewer advisers but the cost to remain fully independent is also rising.

We face growing costs through consumer protection for the FSCS and the Financial Ombudsman Service, which revels in being a growth business in an ever litigious society. All advisers have professional indemnity insurance and, as claims rocket, advisers must consider a vulnerability premium against the possibility of something going awry and the cost of compensation.

We used to provide almost all our advice with no charge or obligation, in the hope of encouraging a relationship. We can now be taken to the ombudsman and have an inequitable decision made against us for a charitable action we did not complete.

We could enact a big pension transfer on a closing scheme on an execution-only basis for just a few hours’ administrative work and end up being accountable for thousands of pounds’ liability because of a dispute over the extent of advisory limits.

For the firm’s security and to protect other clients, we can no longer afford these risks. Our charge is lower than many other advisers have always charged (or certainly take as commission) but it is still an extra consumer cost. We will review this charge and hope to revisit it if the industry norm for liability subsides.

In future, I would like to see a better qualified and more professional industry with greater clarity on product costs and advisory remuneration, including direct sales and on platforms. I would like to see more transparency in terms of what an independent adviser really is, as opposed to the direct/restricted boys clouding the issue.

I also believe clients should take more of the risk. If a client receives the risk warnings for the advisory process and signs to acknowledge that, caveat emptor has to apply. Perhaps we also need to consider a product levy to protect against Keydata-type scenarios. This must apply to platforms as well as execution-only.

Perhaps there could be a separate entity established to collect these sums, with all firms as shareholders, so we could see an equity return as it becomes proven that the reserves have been excessive.

Philip Milton is managing director of Philip J Milton & Company


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There are 7 comments at the moment, we would love to hear your opinion too.

  1. We constantly explain to the FSA, the Treasury, the OFT and the consumer groups that regulation is a burden shared by consumers as well as advisers.

    My Client Agreement explains that regulation is intended for their benefit but its impact on my business is such that 40% of my fee charge is directly attributable to it.

    I wonder how many consumers would wish to be rid of all these quangos and feather-my-own-nest public servants in resturn for a substantial drop in charges and fees?

  2. We all know their is no such thing as a “free lunch” but for years I have sought to explain to my clients where the costs go to.
    It’s all very well for the FSA to insist a statement on the key features “YOUR adviser will receive commission/fees of £X for arranging these services” which implies we are greedy pigs when Alan Lakey above rightly states that 40% goes toward paying for compensating and policing financial regulation.
    It’s no wonder that modern day investors get LESS for their money despite squeezes on adviser commission and fees, yet the regulatory costs spiral out of control.

    Key Feature illustrations should split adviser costs from regulatory, then the consumer would be rightly horrified. A few thousand disgruntled advisers does not worry the FSA but a few million investors involving their MP’s will!

  3. FSA Job Creation Scheme! 28th March 2011 at 10:12 am

    Good idea – the FSA want us to disclose remuneration so why not also disclose the far higher cost of regulation. The FSA is a job creation scheme and the fees are nothing more than a tax to fund it.

  4. At the heart of the series of articles I have agreed with Paul McMillan lie these two very simple but crucial questions.

    What is the cost of regulation?

    What is the cost of regulation – which fails?

    A few examples of the difference – RBS, HBOS, Keydata, Independent Insurance, Equitable Life.

    I have chosen to focus in these articles on the FSCS (for now) because it includes part of the first question – the cost of regulation – simply because it exists and will continue to exist, and yes, should continue to do so – but the crucial question surely – is at what cost?

    Crucially when you separate regulatory costs into two parts, with the important one directly addressing the costs of regulatory failure – a very important distinction emerges, one which demonstrates that the costs of regulatory failure spread much wider than the figures shown in the FSCS annual report, and which may be the subject of a levy, into one which has much wider and longer term costs for society itself.

    To demonstrate that very simple but essential difference, I have chosen in my next article to examine the recent FSCS advertising campaign.

    It is my intention to demonstrate that the costs involved in that campaign have in no way diminished the risks and costs of regulatory failure, but have in fact actually increased both, not just to you, not just to your clients, but to society at large.

    Yes – you probably know (and have perhaps complained over) the advertising campaign which has cost some £4m (to date) – but are you equally and fully aware of the risks and costs of the unequivocal failure it represents – are your clients?

    It is perhaps only too human just to accept failure over which you feel you have no control, and whilst complaining just to pay the price involved, or devise ways to pass the costs on to someone else.

    However, it is also possible to challenge failure and imho it might be worth a few moments of your time, and that of your clients, to read the article when it appears shortly, because it might just offer you, your clients, and society at large an opportunity to reduce regulatory failure – and all its attendant costs – and not just accept them.

    You and your clients may have more ability to control and prevent regulatory failure, and its costs, than you realise.

  5. Some interesting comments;

    We can now be taken to the ombudsman and have an inequitable decision made against us for a charitable action we did not complete.

    If the advice you gave was correct, regardless of whether you transacted any business or not, you should not lose a complaint at FoS.

    We could enact a big pension transfer on a closing scheme on an execution-only basis for just a few hours’ administrative work and end up being accountable for thousands of pounds’ liability because of a dispute over the extent of advisory limits.

    How many clients truly understand their options or what is best for them in these situations. There is still an obligation to ensure your client knows what they are doing, even with EO. Unless your client was an expert, I would suggest you did your client a dis-service and should have passed them onto another firm that was willing to provide advice.

  6. The root cause of the colossal and ever-escalating costs of regulation is lack of accountability, no matter what Hector Sants may have told the TSC at his most recent appearance before it a few weeks ago alongside Sheila Nicoll, smirking smugly in the knowledge that the FSA is effectively untouchable and that such events are just a token charade. In practice, the FSA doesn’t have to take the slightest bit of notice of anything the TSC or anyone else might have to say about the way it conducts itself.

    Why are all the FSA’s staff housed in some of the most expensive office premises in the land? How is the FSA allowed to get away with paying large salaries and £21m in bonuses despite its litany of regulatory failures? Why is the FSA allowed to set its own agenda without regard to costs and to take virtually no notice of representations put to it by the industry? Why is the FSA allowed to ignore totally the provisions of the Statutory Code of Practice For Regulators? How can the FSA possibly justify its estimated cost of £50m for morphing int the FCA (answer: it doesn’t have to, so two fingers to anyone who dares to question the expenditure of such an enormous sum).

    And so the leviathan continues to wield its unaccountable power over the industry. Nothing looks set to change, except for the worse.

  7. @A Nony Mouse
    I would suspect you have not had experience of the FOS adjudication process, otherwise you would not be making these absurd comments

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