OpinionAug 7 2015

Should you include regulatory levy charge in fee bill?

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Should you include regulatory levy charge in fee bill?
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At the end of last week, Barnett Waddingham’s Andy Leggett wrote a thought-provoking blog on the purpose of the Financial Services Compensation Scheme.

He warned that the FSCS has lost its way and urgently needs to reassess its purpose, aims and funding.

“The ‘good guys’ are paying for the misdeeds of rogues. Increasing the compensation limits without addressing these serious underlying problems will magnify the problems and, ironically, leave consumers worse off,” Mr Leggett wrote.

I could not agree more.

At the beginning of July, I wrote a news story about some advisers seeing their levies go up, with one in particular telling me that his fees had jumped by an incredible 400 per cent.

The adviser, who declined to be named, told me: “How can my fees go up so much in relation to my turnover, when compared to other firms? It must be something to do with my business mix, but I can’t easily tell. The bill is big, but at least if I understood it, perhaps it would be easier to bear.

“Something has to be done about this. The bad is driving out the good. I accept that the FSCS has to be paid for, but there’s got to be a better way.”

He was not alone. Others I spoke to saw rises of at least 50 per cent. As regular readers will know, I have bleated on for some time that these levy hikes are completely unsustainable.

What angers advisers the most is that this is driven by unregulated investments, which are mainly wrapped into self-invested pensions.

Following the FSCS’s announcement in April that life and pension advisers are to be hit with the maximum levy of £100m in 2015 to 2016, advisers called for radical solutions, including those willing to advise on unregulated investments being carved out from the rest of the sector, as well as a product levy spread across all products.

But in the meantime, how can this be tackled? I for one could not afford a 400 per cent annual rise in my bills.

One FTAdviser commentator wrote on Mr Leggett’s blog that he knows of one firm that has started including a FSCS ‘charge’ in its adviser fees.

This adviser may be on to something. While some have told me they do not intend to pass this fee onto clients, this ignores the fact that advisers are running a business.

If overheads increase by 400 per cent - granted, I realise this is an extreme case - a percentage of this must be passed on.

So, if an adviser charges £200 an hour, there could be a line in the bill which says £10 (or whatever) of this will go towards regulatory fees. Having said that, would it still be a fixed fee if an adviser charges a percentage of funds under management, or would it be a tiny percentage of this figure?

Furthermore, would flagging up regulatory fees put a client off?

It would be helpful for clients to be able to see in black and white the impact of regulation on the fees they pay

Caroline Escott, senior policy adviser at Apfa, told FTAdviser that this idea crops up regularly in discussion with members and others in the industry.

“We also know that there are a few Apfa members who have already started explicitly stating upfront what proportion of a client’s fee go on regulatory costs and breaking it down in terms of Fos, the FSCS levy etc.

“I think it’s a really interesting idea and, depending on how it was done, could be a useful tool for not only advisers and clients but also the regulatory bodies themselves as it could potentially raise awareness with clients of the role that Fos and the FSCS play,” she explained.

“I think it would be helpful for clients to be able to see in black and white the impact of regulation on the fees they pay for professional financial advice.”

“In terms of practicalities, some kind of standardisation of methodology across the industry might be helpful and steps would possibly also need to be taken so that clients could trust in the accuracy of any regulatory cost figures.”

Adrian Murphy, partner at Murphy Wealth, added that on one hand you could easily justify doing it, assuming you were able to reasonably work out the cost per client, bearing in mind we are explicit with other charges.

“On the other hand, consumers may just say ‘that’s just the price of being in the industry’. I agree with the principle of making consumers more aware of the cost of regulation and the manner in which it is funded; they will be unaware how much it is ultimately costing them.”

Let’s just hope this issue is tackled sooner rather than later.

donia.o’loughlin@ft.com