Analysts have warned investors on St James’s Place and Hargreaves Lansdown, predicting such firms could feel the pinch of rising regulatory costs amid a flurry of misselling claims across the industry.
In a research note published this month, Berenberg said market weakness — with UK equity markets having fallen about 23 per cent from their peak — could create significant losses for investors.
Such investor losses, combined with an excess of claims management companies, which it said were “searching for new markets” in the aftermath of the PPI scandal, would drive an increase in misselling claims in the next few years, Berenberg warned.
This in turn would affect the Financial Services Compensation Scheme - and the size of its levy - if firms fail as a result.
The bank added that the design of the FSCS meant even firms with strong processes were likely to be affected. It said the additional cost pressure this implied for companies like SJP and Hargreaves was “particularly unhelpful”, given the recent decline in revenue expectations.
As first reported by FTAdviser's sister publication Ignites Europe, the analysis came as the bank maintained its 'hold' rating on both Hargreaves and SJP.
It predicted the FSCS levy would constitute around 12 per cent of SJP’s cost base and 5 per cent of Hargreaves’ expenses this year and that both the groups’ operating margins would be higher without this expense.
Berenberg concluded in its base case that SJP and Hargreaves would be exposed to 20 per cent increases in their FSCS expense over this year and next.
It noted the costs of the FSCS had already continued to rise. It said: “The total expense of the FSCS has grown at a three-year compound annual growth rate of 15 per cent, costing UK financial services firms a total of £516m last year.
“This covers a period of generally rising asset values, which one would expect to limit claims for misselling", an indication the figure could increase following recent volatility.
The hefty 162,000 consumers who transferred out of defined benefit pensions in the UK between April 2015 and September 2018 also posed an indirect but “potentially sizeable” issue for firms exposed to levy costs, according to Berenberg.
The analysts pointed to work by the City watchdog which found 29 per cent of all DB transfers were unsuitable while 23 per cent were unclear.
It said: “Even if only one-third of people missold pension transfers apply for compensation, this still implies a £600m bill. We believe the risks to this figure are strongly skewed to the upside.”
Other issues flagged by the analysts included the fact that few small adviser firms have the resources to meet substantial claims against them - meaning the claims would fall on the FSCS and ultimately the industry.
FTAdviser approached SJP for comment, Hargreaves Lansdown did not wish to comment
imogen.tew@ft.com
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