FSA study: 250 firms’ post-RDR profit lower than FSCS levies
Deloitte research shows one in 10 not profitable after 2012 due to higher regulatory costs.
More than 250 adviser firms face an implied compensation scheme levy that will be higher than their entire annual profit post-Retail Distribution Review, according to research commissioned by the Financial Services Authority from business consultancy Deloitte.
The research, which was completed in March but published today (25 July) alongside a new consultation on changes to the Financial Services Compensation Scheme funding model, shows that 171 firms in the life and pensions intermediation sub-class and 80 in the investment sub-class could not meet the implied levy out of their profits under the current regime.
The consultation proposes increasing the caps on intermediary sub-classes, meaning FSCS costs could be even higher and more firms would be unable to afford the levies. The investment sub-class could see its cap, for example, increase by 50 per cent from £100m to £150m.
Moreover, according to the Deloitte study, almost one in ten intermediary companies across the two RDR-affected sectors of life and pensions and investment could become generally unprofitable post-2012.
Increased regulatory costs coupled with lost income in the switch to fee-based business models could mean 8 and 9 per cent of firms in the life and pensions and investment sub-classes respectively would no longer be profitable after the regulatory change, the report says.
For the life and pensions sector specifically, the research estimates a base scenario regulatory cost of £47.3m, 77.5 per cent of which could be passed on to consumers by intermediary firms through their fees, the report claims.
This leaves a £10.6m cost for the industry to pick up, although this ranges from as low as £2.2m up to £20.5m in various scenarios.
In the investment intermediary sub-class, the base scenario cost would be £70.8m, ranging from £64.8 to £76.8m, with again an estimated 77.5 per cent passed on to consumers.
This will leave an estimated £15.9m to be covered by the industry, though this ranges from £3.2m to £30.8m in the low and high cases respectively.
Deloitte adds in the report that there could be a movement in income of 20 per cent either way for firms switching to fees from a commission model post-RDR, while in its worst case scenario there is also a drop in profit margin of around 20 per cent.