The Association of Professional Financial Advisers has called on the Financial Conduct Authority to compensate adviser firms which do not hold client money that the regulator has admitted were hit with disproportionately high fees compared to higher-risk peers over a number of years.
Back in October it was announced that almost 7,000 advice firms could enjoy a drop in FCA regulatory levies if a proposed restructuring of how fees are collected is approved by the regulator.
Under the current model, the typically smaller firms that fall in the A13 fee block and do not hold client money are effectively charged more than twice the rate compared to those in the riskier A12 fee block of larger firms that do hold client assets.
To mitigate this and to prevent firms taking the counter-intuitive step of taking on more risk to reduce regulatory fees, the FCA has proposed merging all advisers into the A13 fee block and creating a new A21 block to levy an additional fee on those that hold client money.
The FCA said close to half of adviser firms would see a drop in their regulatory bill if the proposals are passed, with those in the A13 block seeing their rate drop from £6.39 per £1,000 of income to £2.84.
Chris Hannant, director general of Apfa, said the new categories being proposed will better reflect the risks that firms pose, distinguishing between firms that hold assets for clients and those that do not.
However, Mr Hannant said that A13 firms had paid a far greater share of the bill than they should have in previous years and had thus been over-charged by “thousands of pounds per firm”.
He said the FCA should remediate affected advisers by reducing their fees for 2014 to 2015 to correct this error.
Currently, the FCA takes about £44.5m from firms in fee block A12, which hold client money. Because these firms have an average income of £19.1bn, this works out to an average fee of £24,038, or roughly £2.39 per £1,000 of income.
Advice firms which do not hold client money - and are therefore considered lower risk - fall instead under fee block A13, from which the FCA takes a lower overall sum of £39.2m in fees. However, because these firms are typically smaller this works out to an average of £6,200 per firm, or about £6.89 per £1,000 of income.
The FCA admitted this could have the effect - though it stressed it has not seen this in practice - of encouraging firms to take on the additional risk of holding client money in order to enjoy substantially lower fees.
Under the new model all adviser firms would pay a total of £70.6m in levies in the A13 fee block, reducing the effective rate to £2.84 per £1,000 of income. Firms in the newly-created A21 fee block would pay a total of £13.1m, or £92.59 per £1m of client money held as well as £0.31 per £1m of safe custody assets held.
The FCA said across the two fee-blocks, 43 per cent of advisers would see a decrease in their regulatory bill. A further 44 per cent would see no change and 13 per cent would see an increase.
