Aj Somal joins a growing list of disgruntled advisers who have blasted the recent fee hikes by both the Financial Conduct Authority and Financial Services Compensation Scheme, as he says the spiralling costs punish well-run businesses for the mistakes of badly-run practices.
The IFA at Birmingham-based Aurora Financial Planning argues that it will be impossible to “bring in new blood” to the profession if there is a fall in the number of companies offering advice.
The FSCS funding means that well-run, compliant firms have to pay for the bad practices of poorly run firms Aj SomalMr Somal says: “There has been a sharp rise in professional indemnity premiums over the past few years, and it would be a real shame if that meant well-run, small financial advice companies going out of business, as it would mean even fewer clients being able to access high-quality financial advice by qualified financial professionals.
“There is a need to bring in new blood into the profession, and if there is a fall in the number of firms that offer advice, then this drive to bring in new blood will be undermined.
“The FSCS funding means that well-run, compliant firms have to pay for the bad practices of poorly run firms, this is an age-old argument, and has been debated ever since I entered the profession over 20 years ago.
Key Points
- Advisers are complaining about the recent hike in FCA and FSCS fees
- Increased fees are preventing the profession from developing
- The FCA is accused of restricting access to good financial advice
“There is no easy answer to the funding of the FSCS, but a review of the current funding structure is required, with perhaps well-run firms who have a very low historic complaint level paying less than those firms that have had a history of complaints in the past.”
The need for urgent change is echoed by Ricky Chan, who stresses that the industry is “approaching tipping point” as the current model is “broken and unsustainable”.
The director and chartered financial planner at London-based IFS Wealth & Pensions says: “I think we’re approaching tipping point, but the worst is yet to come – there will be increased claims during the recession when markets fall and issues emerge relating to defined benefit transfers. Both PI insurance and FSCS [costs] have been ever-increasing and adding pressure onto advisers.”
He adds: “The current ‘good guy pays’ model is quite simply broken and unsustainable, yet no one, not the FCA or the Treasury, wishes to take responsibility to proactively find a better solution, despite the Personal Finance Society’s and advisers’ lobbying.
“I have no doubt that this is hindering our profession to progress and innovate, and ultimately it reduces consumers’ access to affordable advice simply because the cost to open a client case file is also rising every year – firms cannot keep costs at the same level forever.”
In particular, he criticised the FSCS levies, which raised £319m in 2015-16.
However, in five years, this figure has more than doubled to £649m in 2020-21’s forecast. Interestingly, the latest figures include a provision of £44m set aside to cover the London Capital & Finance unregulated mini-bonds saga; it is worth noting very few authorised advisers would have been involved with them.
Mr Chan says: “In extreme cases, such as DB transfers, we’re already seeing that clients seeking advice in this area are being left frustrated and disappointed because there is a lack of appetite to serve them.
“This is due to the enormous future liabilities, restrictions and implications on PII, and higher FSCS fees. Those who do provide this advice will not be charging cheap fees either.
“The rise in regulatory costs adds the most pressure to the smallest firms and will accelerate acquisitions of firms and those retiring or leaving the profession – this would certainly reduce choice for clients.
“Would consumers receive better advice and service in a world of just a handful of giant advice firms, which typically operate a vertically integrated model? I’m not so sure.”
Furthermore, Alan Lakey says the fault is caused by the regulator failing to understand how advisers actually operate.
The director at Hertfordshire-based Highclere Financial Services says: “Not only are the fee hikes pushing advisers out of business, but with fewer firms the ever-increasing burden sits heavier on those that remain, which implies a spiral where the ever-decreasing few pay for the misdemeanours of others.
“The FCA really doesn’t grasp how advisers work. Its top-down approach removes it from the reality of how a typical adviser firm operates.
“That old phrase ‘a perfect storm’ encapsulates the next few years with recession, fewer firms to pay the levies, ever-rising PI premiums and the FSCS unrestrained by any time-bar limitations and having a wide remit about what cases it can pay compensation on.”
Progression hindered
Andrew Elson argues that the excessive fees actually hinders innovation in the industry as advisers are prevented from growing their own business and instead opt to seek out “the perceived safety of joining a larger firm”.
The chartered financial planner and founder of Leeds-based Berry & Oak says: “The issue of fees is a very emotional one as nobody likes paying too much. The FSCS fees and the way they are shared around just feels wrong.
“It does restrict the ability for firms to grow as the money spent on these fees could have been spent on a new member of the team, which in turn would have helped us to expand our reach and serve more clients.
“It makes it difficult for a new firm to set up, as they worry if they would be able to pay their bills in the future and this has led to more advisers seeking out the perceived safety of joining a larger firm instead. This stifles innovation and will lead to less independence.”
He adds: “The whole model must be broken though when we are paying considerably more into the FSCS lifeboat fund than we do for the cost of regulation. If there was better and more timely regulation there wouldn’t be such a need for the FSCS.”
Scott Gallacher has labelled the rise in fees as “free lunch” and called into question the accountability of regulators as he says decades of regulation has not weeded out bad advisers.
The chartered financial planner for Leicester-based Rowley Turton says: “Unfortunately, regulation, and the associated fees, are to some extent a free lunch for the government as it costs the government almost nothing to regulate financial services. This is because the costs of that regulation are passed onto the regulated firms via fees or levies.
“But where is the accountability? We have seen examples when advisers raise objections about the current regime with their own MPs, or even the Treasury, and those objections are then simply waved away on the basis that the FCA is an independent body and it is therefore not a problem for the Treasury.
“So, we have a system of regulation with almost no accountability to those being regulated. This alone would be a problem but perhaps forgivable if regulation was seen to be working, but is it?”
He argues that if more than 30 years of regulation had worked, we would have seen the elimination of bad advisers and bad advice, and we would now be talking about whether the FSCS scheme was even required. But he says this has not happened.
Mr Gallacher adds: “As individual advisers we cannot plan for, or mitigate, rising FSCS levies and our own actions seemingly have little impact on rising PI premiums, which have not been helped by the recent increase in the FSCS limits.”
Tipping point
Mr Gallacher says that the cost of regulation is now so high that many advisers are unable to recruit staff or invest in their business. He argues that the FCA is now in danger of losing the very thing that it has been aiming for, which is for consumers to have access to sensible advice.
He says: “I do think we are now at a tipping point where the costs of regulation are no longer just a ‘barrier to entry’ but also a barrier to trade or invest, and I have heard several advisers cancelling recruitment and other investment.
“The current system with ever-increasing regulation and costs will ultimately lead to fewer advisers, higher advice costs and independent professional financial advice only being available to the very rich.
“As someone who is old enough to have worked with those advisers that started off helping the working class buy their own council homes in the 1980s and early 1990s, it is a little sad.”
These appeals come as Financial Adviser recently launched its Keep Fees Fair campaign calling for a review of the level of fee increases on regulated businesses.
Worryingly, some have reported increases of 61 per cent, some 85 per cent and others even higher – all this without having committed any regulatory failure over the past financial year.
Financial Adviser has already highlighted the lack of appetite at the FCA for reviewing its fee structure, but with a new chief executive coming into the top position at the City watchdog, now could be a good time for the industry to evidence the strength of feeling and the concerns over poorer consumer outcomes as a result of punitive regulatory fees on hard-working advisers.
Fiona Kidy, the FSCS’s chief financial officer, says: “We share the real desire to help reduce the levy on the industry and protect customers. As part of our strategy, FSCS is collaborating with FCA, the Fos and the Insolvency Service around phoenixing.
“In addition, FSCS has sought to address these concerns by convening industry panels to exchange information on current issues and potential concerns in the investment and pensions, and general insurance markets.”
A statement by the FCA says: “The board has carefully considered our approach to fees for the year ahead. The coronavirus crisis has added to the challenges already facing the FCA and it is more important than ever that we can deliver our objectives this year.
“To enable us to continue our activities while transforming our capabilities and systems, we have carefully reviewed and challenged our budgets across the organisation. The headline figure is a 2 per cent increase in our core budget, in line with inflation.”
Aamina Zafar is a freelance journalist
