Your IndustryAug 4 2016

Brexit, FSCS levies and Sipps could pose problems

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Brexit, FSCS levies and Sipps could pose problems

The changes to the regulations do not apply to all the 14,000 PIF firms, only to the 5,000 directly authorised PIFs which provide both restricted and independent advice.

For example, networks such as Tenet provide a capital adequacy shelter, in that the requirements are for the principal - the network itself - and not the appointed representative.

Even so, Mike O’Brien, group brands director for Tenet, points out the minimum threshold of £20,000 or 5 per cent of a firm’s investment business’ annual income is “fairly modest”.

Therefore, he does not believe the financial obstacles of raising this amount should be too great for the vast majority of directly authorised regulated advisory firms in the UK.

Smaller firms are also likely to face a massive increase to the FSCS levy, and there is a real risk smaller firms won’t be able to afford it Jamie Smith-Thompson

Mr O’Brien explains: “There has been a long time for advisory firms to prepare for the changes and the amounts involved are lower than initial expectations.”

Fees and levies

However, not all smaller firms agree with this point of view, seeing this increase as just another in a long line of costs and levies on the financial advice industry.

This is the view of Jamie Smith-Thompson, managing director of Portafina, who comments: “The extra costs could slow or stop business expansion.

“Smaller firms are also likely to face a massive increase to the Financial Services Compensation Scheme levy, and there is a real risk smaller firms won’t be able to afford it.”

Tim Sutcliffe, chief executive of Pi Financial, agrees. He says: “Smaller firms with a turnover of less than £400,000 may struggle to hold reserves of £20,000.

“However, £20,000 only represents four times the excess (£5,000) on ‘compliant’ professional indemnity insurance.”

And Caroline Escott, senior policy adviser for the Association of Professional Financial Advisers (Apfa), believes the cost of the FSCS for advisers could be an obstacle.

She says: “One continued obstacle faced by smaller firms remains the current FSCS levy approach. One of the FCA’s intentions in setting new minimum capital adequacy requirements was to reduce reliance on the FSCS, which could potentially feed through to a reduction in the FSCS levy.

“However, much more radical reform is needed to the way in which FSCS levies are allocated and collected to enable firms to invest in and plan for the future.

“We see merit in a risk-based levy, although the challenge remains finding a suitable way of measuring risk, but think the best option remains a product levy.”

Additional rules?

Linda Todd, head of Bankhall Operations, does not believe there will be additional rules ushered in before June 2017.

She says: “I would not expect any further rules or clarifications. The new rules are already in force, albeit with transitional provisions - and the FCA has already fully consulted on these rules via CP15/17, so has already considered the feedback from industry stakeholders.”

According to Ms Escott: “As the new minimum has been broadly accepted by the industry, I imagine the FCA will wait for the current rules to settle in before re-examining whether they need to issue further rules or clarification.”

Potential problems

According to Tenet’s Mr O’Brien, some might consider the thresholds too low - and it might not be effective enough.

He comments: “Some may argue £20,000 is too low to be effective in preventing claims ending up with the Financial Services Compensation Scheme (FSCS).

“To put it into context, it is roughly equivalent to two policy excesses under a typical professional indemnity policy.”

Even the FCA believed the former minimum capital resources requirement (£10,000) was too low, stating in its December 2015 Policy Statement this figure had been “almost halved in real terms since it was set in 1994.

“As a result, it would now be insufficient to meet just one average pension or investment claim following unsuitable advice. We do not want compliant PIFs to fail unexpectedly under normal operating conditions, resulting in claims on the FSCS, which would then need to be funded by other firms in the sector.”

PI cover

Keith Richards, chief executive of the Personal Finance Society (PFS), believes professional indemnity insurance could be hit.

He says: “There is a slightly worrying trend of some professional indemnity insurers considering pulling out of certain areas of advice which are deemed too risky to cover.

A full withdrawal could increase barriers to operating in the UK, push up the cost of doing business here and reducing consumer access to a less competitive advice market Keith Richards

“This will force advisers to self-insure through the provision of greater capital adequacy reserves or otherwise face a potentially significant and catastrophic future liability failure.”

He adds the insistent client issue remains a major concern for both insurers and advice firms, saying: “The PFS believes change is required to give clients the opportunity to take responsibility in cases when they require an adviser to facilitate an activity contrary to the personal recommendation of professional advice.”

Brexit

The vote to leave the European Union might have an effect on revenues for advisers, which might have a knock-on impact on capital reserves, Apfa’s Ms Escott suggests, but she believes it will be too early to tell.

She says: “It’s too soon yet to gauge the precise effect of Brexit on smaller advice firms’ business, although we have heard of a spike in calls from clients wanting to understand the effect on their investments.”

Mr Richards adds: “It is is too early to speculate about the impact of Brexit on the UK advice market, other than to say there is a longer-term risk a potential full exit from the Single Market could pose a major challenge for firms operating in Europe.

“Furthermore, a full withdrawal would potentially increase barriers to operating in the UK, thereby increasing the cost of doing business here and reducing consumer access to a less competitive advice market.”

Sipps

Advisers are also worried about firms with whom they place a lot of their clients’ money.

In July this year, Momentum Pensions issued a statement which claimed 54 per cent of advisers were concerned a self-invested personal pension (Sipp) provider they use would not be able to meet the Sipp capital adequacy requirements, which come into force in September this year.

Rules on Sipps:

The FCA’s new capital adequacy rules for Sipps comes into effect on 1 September this year.

The fixed minimum capital for Sipp operators is £20,000

Capital surcharge to be applied for firms holding non-standard assets

Physical gold bullion, national savings and investment products, bank deposit accounts, units in collective investment schemes and UK commercial property will be classed as standard assets

Loans and financing

Bankhall’s Ms Todd adds: “The restriction on the use of subordinated loans from 30 June 2017, which is being extended to category B3 firms, may pose challenges for recently established firms who have relied heavily on loan capital to meet their financial resource requirements.”

She advises firms which may have subordinated loans should seek advice from their accountants.

Ms Todd also says firms which have been established for a while should have already transitioned their income from a previous commission basis to an ongoing fee basis, which should mean they are on a more “stable footing in terms of income”, but warns this could be challenged by market downturns.

Communication

While there are potential obstacles, Mr Richards says if the industry and government work together, the outcome could be good.

He adds: “As the PFS often reiterates to its own members, acting in the best interests of clients will help to avoid future liabilities, even if that means walking away from short-term commercial opportunities.”