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By Michael Trudeau and Ashley Wassall | Published Jul 25, 2012

FSA study: 250 firms’ post-RDR profit lower than FSCS levies

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.

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