According to many advisers, the current regulatory framework is “too onerous” and the bottom-line cost of being in business is too high to allow businesses to answer the Financial Conduct Authority’s calls for greater innovation and lower fees for advised clients.
Paul Gibson, financial planner at Granite Financial Planning, told Financial Adviser: “Streamlined advice and guidance, while good ideas in theory, are not working effectively primarily for these reasons.
“The current professional indemnity market and Financial Services Compensation Scheme levies are really in turmoil. This needs to be resolved as the current system is inherently unfair on the good firms.”
Mike Jordan, IFA at Jordan Financial Management, agreed. He said: “Every time the regulator adds more requirements and processes you have to then spend more money on either employing more staff or outsourcing to get these requirements covered.
“Then there are the spiralling regulatory and FSCS fees – so the starting point is charging enough to cover the costs of things you are required to do under regulations, then the costs of enabling your business to achieve the level of service you want to provide to your clients.
“To be able to reduce costs for clients, the regulatory and fee burdens need to be looked at and the cost of these cut.”
Earlier this month, the FCA published its long-awaited review of the advice market, which warned of “significant” price clustering and competition not operating effectively in the sector.
In its 66-page evaluation of the Retail Distribution Review and the Financial Advice Market Review, the City watchdog said advisers were not encouraged to innovate or offer new and more affordable services, especially to less wealthy customers.
The issue of growing regulatory costs has been at the forefront of calls for reform within the industry this year, but it has been given new wind in response to the regulator’s rally call for the market to reach more consumers.
The FCA warned the clustered charges it had found in the market were not explained by “economies of scale”, with little indication businesses with more clients, or more affluent clients, had lower charges.
Alasdair Walker, managing director at Handford Aitkenhead & Walker, said the widening advice gap was in part thanks to the professionalism and up-skilling of the sector, but said this had been necessary.
Mr Walker said: “As regulations have tightened, qualification requirements have risen, cost-base for regulation has risen, and those costs are inevitably passed on to the consumer.
“That’s not to say that any of this is bad. I am convinced that client outcomes have improved significantly in the past decade, but this feels like an obvious consequence that should have been considered by the FCA as part of their strategic planning 10 years ago.”
On the whole, the FCA said the financial advice market was “improving, albeit slowly” since the introduction of RDR and FAMR, but still had “further to go”.
The FCA called for a broader range of services in the sector to support more consumers in deciding whether to invest and find appropriate investments.
Ricky Chan, director at IFS Wealth & Pensions, said: “There are various issues at play here and it boils down to two things: supply and demand of advisers and financial advice, and the cost of regulation and FSCS compensation for poor advice.
“The FCA should look to tackle these fundamental issues because, with the cost of regulation rising and demand for advice greater than ever, advice fees are unlikely to fall in the short-term.”
An FCA spokesperson said: “Improving the mass market for consumer investments is a core plank of our business
plan priority to improve the overall consumer investments market.
“That’s why we issued a wide-ranging call for input.
“We are grateful for the feedback we have received, which we will now consider alongside the evidence from our review of RDR and FAMR, to inform our next steps to tackle some of the challenges in this market.”
rachel.mortimer@ft.com, imogen.tew@ft.com, amy.austin@ft.com
