LevySep 16 2021

'Who are these third parties?': Advisers question FCA’s audit proposals

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
'Who are these third parties?': Advisers question FCA’s audit proposals

Advisers have mixed feelings about the regulator's proposed third-party audits of advice, which have been touted as a potential solution to the hardening of the professional indemnity insurance market and rising compensation levies.

The Financial Conduct Authority said in its consumer investments strategy yesterday (September 15), firms that can demonstrate they have given good advice should be able to get PII at a fair price, despite the market shrinking from 15 to five providers in the past five years.

It said one way to do this could be via a third party audit, where an independent company would assess the quality of advice given and thereby instil confidence in the insurer.

The more liabilities are unmet, the more the Financial Services Compensation Scheme levies on advisers are driven up, the FCA warned. 

As such the proposal could prove a major part in solving a regulatory deadlock that has trapped advisers for years.

But advisers are not so sure about how it would work.

Martin Bamford, head of client education at Informed Choice, told FTAdviser: “Peer review would only be an acceptable solution if it replaces the regulator. To suggest that professional advisers need a peer to mark their homework is offensive.”

Bamford added: “I’m not holding my breath that these proposals will solve anything. We supply so much data to the FCA, especially through their multiple Covid surveys, that they must know how intolerable the current and proposed levies are.”

Advisers fall under the Life Distribution & Investment Intermediation class which the FCA is hoping will see its levy stabilised following a series of measures proposed by the regulator. 

It’s certainly a step in the right direction, but if it's not done correctly, it could end up being a car crash.Sam Marriott

Indeed, from 2025 to 2030 the FCA intends to target a 10 per cent year-on-year reduction for this and the Investment Provision funding class. But this will mean advisers will have to wait another four years before levies come down.

As for PII, FCA data shows costs for firms, which have previously advised on defined benefit pension transfers, have increased from around 1-1.5 per cent to 3-6 per cent of a firm’s income.  ​

On this front, the FCA didn’t commit to a percentage reduction like it did on FSCS levies. Instead, it placed the emphasis on advisers and the quality of their advice.

Mixed feelings

Sam Marriott, director and co-founder at CSE Financial Services, told FTAdviser he had “mixed feelings” towards the FCA announcement yesterday with regards to the third party audit proposal.

“In principle, I think it's a great idea as I, and many colleagues of mine, believe advice in the market has taken a downward turn, and there hasn't been an independent body step up to monitor and correct poor advice.”

But Marriot is unsure whether the FCA’s solution to this is the right one.

“The problem I have with this is, who are these third parties? Do they have the experience in real world advice to be able to say what is good advice and what is poor advice? How would they differentiate the criteria between those who are network appointed representatives and directly authorised?”

Marriot concluded: “It’s certainly a step in the right direction, but if it's not done correctly, it could end up being a car crash.”

Tim Morris, an IFA at Russell & Co Financial Advisers, said: “Using a third party compliance firm to carry out advice checks makes sense yet adds to costs and will further squeeze the ability to deal with clients at the lower end of the scale.”

He added: “This will further increase the advice gap.”

Alongside the FCA’s focus on making PII cheaper and more accessible to drive down the FSCS levy, it also suggested an increase in capital requirements for advice firms.

Its thinking is that higher capital requirements could be used to prompt firms entering the market “to think carefully” about giving advice in high-risk areas.

Morris said: “Increasing preventative measures such as capital adequacy requirements sounds sensible. The only issue is these potentially draconian methods have the potential to be overly onerous and force more small businesses from operating in many areas of advice.”

Why the delay?

With any measures tackling the rises in FSCS levies and PII costs not set to be addressed until 2025 at the earliest, some advisers are questioning why the FCA isn’t committing to more immediate targets. 

“What [the FCA] are going to do in 2025 does not address the issue now,” said Andrew Oliver, an IFA with his own firm.

Oliver has previously written a letter to his MP on the funding of the FSCS levy, arguing “it was not sustainable in its current form”.

We are set to see huge increases in the levy for general insurance and pure protection intermediaries, due to the overspill from the investments classes.Alan Knowles

In response, he said a minister told him “how fortunate” he was to have a scheme for his clients and the reassurance that it is provided. 

“They didn’t even address the funding issue. Until recently, the FCA said the same. It seems that it’s only when it gets so bad that they actually start to look at it and right now it appears that’s all they are doing.”

Oliver cited the recent discovery by FTAdviser that the FSCS has identified some 400 phoenix firms - that is, advisers which are now pursuing claims against their old firms as claim management companies.

“It’s firms like mine that are getting hit financially whilst these other firms just fold and re-start,” said Oliver.

He called the FCA’s plans “regulation with the benefit of hindsight”, and instead wants to see something more “forward thinking”.

Alan Knowles, managing director at high-risk protection-focused firm Cura Financial Services, told FTAdviser his firm will "be hugely affected by the FSCS levy" going forward, despite the fact his team works in the pure protection space - which falls under the general insurance class, rather than the LDII and Investment Provision funding classes.

He said: "We are set to see huge increases in the levy for general insurance and pure protection intermediaries, due to the overspill from the investments classes. But the work the FCA is proposing is mainly geared at investment firms.

"In the long run this should help protection intermediaries but not for a long time, after which the hikes may have already done their damage to many firms."

ruby.hinchliffe@ft.com, with additional reporting from sonia.rach@ft.com and amy.austin@ft.com