IFAFeb 14 2022

FCA's advice regulation 'unrealistic' for small IFAs

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FCA's advice regulation 'unrealistic' for small IFAs

The Financial Conduct Authority’s suggestions about segmenting advice are “unrealistic” for smaller IFAs, as many struggle to reduce the cost of their advice while juggling increased regulation.

This was according to a panel at the Lang Cat Live event in Piccadilly last week (February 10), which featured Sheila Nicoll, head of public policy at Schroders, and Jo Little, director of wealth management firm Emery Little.

Little, speaking as a smaller advice firm, said it was “unrealistic” for the FCA to keep adding more regulation on firms and simultaneously expect them not to increase the cost of advice.

“I actually know firms which are having to increase their fees, and this isn’t what the FCA wants,” she said.

Back in December 2020, the regulator warned of "significant" price clustering in the advice market, with its research finding that more than 80 per cent of ongoing holistic advice services had adviser charges set at only three price points - 0.5 per cent, 0.75 per cent and 1 per cent.

The City watchdog said this meant advisers were not encouraged to innovate and offer new and more affordable services, especially to less wealthy customers. 

But, as Little argued, smaller firms already feel squeezed by other FCA regulations, making it very difficult to bring the cost of their advice down.

According to FCA data, firms making up to £100,000 in revenue a year spend 5 per cent of that paying for professional indemnity insurance. Meanwhile for the largest advice firms, the cost of PII as a proportion of revenue has either gone down or stayed flat.

At the beginning of this year, the regulator also introduced an increase in fees paid by newly-authorised firms, and is currently considering whether firms should pay a premium on levies for carrying out higher risk activities or selling risky products.

The FCA itself has also said the high number of firms in the financial services and advice market means it is "really easy" for bad actors, suggesting fewer small firms means better outcomes for consumers.

Speaking as a larger firm, Schroders’ Nicoll questioned: “How on earth can they [smaller firms] survive? We struggle as a larger firm to keep up.”

Nicoll went on to suggest the FCA’s recent messaging has made it harder for firms, big or small, to gain the trust of new clients seeking advice.

She said there was a contradiction in the regulator’s findings, which point to the need to get more savers to move their assets into investments, and yet also keep highlighting “how expensive we [advice firms] are”.

This, paired with the FCA’s Consumer Investment Strategy which is looking at segmenting advice to flag higher risk investments, makes it hard for firms to gain clients’ trust, according to Nicoll.

“We’re supposed to sit down with clients and say ‘it’s going to be really expensive and it could all go wrong - but trust us.”

FTAdviser approached the FCA for comment.

ruby.hinchliffe@ft.com