Last week, I demanded the regulator acknowledge the repeated concerns of advisers in relation to the burden, among other things, of fees. It appears to be listening.
To be clear, I’m not claiming my vituperative was to any degree an agent in the process. But the publication yesterday (28 May) of a long-awaited paper on adviser capital adequacy gave a strong indication that the watchdog is alert to the issue and willing to take action.
First, the proposals. Put simply, advisers will have to hold a minimum capital reserve of double the current £10,000 when the full rules come into force in 2016.
In addition, the expense-based calculation which upped this for firms with more than 25 advisers has been scrapped: now firms of all sizes will need to hold either the £20,000 minimum or 5 per cent of investment business income, rising to 10 per cent for firms holding client money.
The change to the base figure was expected and formed the key thrust of already delayed proposals that were put up for further review in 2013. That review has, however, revised the way the final figure was calculated to prevent firms gaming the system.
How does all this affect the fees burden faced by advisers? Well, as the paper was at pains to point out, average compensation claims relating to failed investments is £11,000, with more than half having a link back to a recommending financial adviser.
Every failed firm whose claims fall on intermediaries adds to your bills. A surge in such cases in recent years, most recently due to esoteric investments held in self-invested pensions, has pushed total FSCS levies for advisers to £216m this year, with a top-up levy of £20m having additionally been billed in March.
The revision to the calculation basis is significant: it prevents firms from reducing their bill, and thus their protection, by, say, not hiring that 26th adviser; minimising the use of paraplanners to aid processes; reducing spending on systems, and so on.
In all, the FCA says 684 firms currently hold only the £10,000 minimum. Firms of this nature that fail amid heavy claims are likely to add to bills being paid by the rest of the sector.
Paying on the basis of business that is conducted ensures a fair proportional contribution for most. To boot, it will reduce the cost of capital for a lot of medium-sized advisers that do not hold client money, with revenues above £400,000.
On the other hand, even the FCA has admitted it isn’t sure how much difference all of this will make, admitting in the paper that historical analysis offers no proof of efficacy. But I’m glad it is trying, at least. And there’s more.
In the paper the regulator unexpectedly announced it was undertaking a formal review of FSCS funding by the end of next year. FTAdviser had previously reported on talks that had begun informally last year, which it appears are to evolve into a more formal process.