In its initial response to the Financial Advice Market Review launched earlier this week by the Financial Conduct Authority and Treasury, The Association of Professional Financial Advisers said that, in order to address this, the cost of regulation must come down and the problem of liabilities faced by financial advice firms and the costs this involves needs to be addressed.
According to the trade association, while it believes that investment advice can be extended to the mass market, in order to achieve this “reasonable and measured changes to the regulatory framework” are needed.
Pointing out that its recently conducted ‘cost of regulation’ survey showed that the direct and indirect cost of regulation currently makes up 12% of a firm’s costs and by inference 12% of the price of advice, and adding that it expects further costs to arise as a result of the obligation under MiFID II to keep telephone recordings for five years, Apfa says these increased fees are inevitably passed on to consumers.
“There is the need for ‘better regulation’. This could be achieved by cutting regulatory costs for firms. There are a number of other measures that would help reduce costs: reducing reporting requirements; freezing the regulatory bodies’ budgets in nominal terms for three years; Simplifying the FCA handbook, by reducing its length by a third over three years. bringing back the regulatory fines (removed in April 2013) to reduce the cost of regulation,” said.
On the liabilities side, there is also work to be done, Apfa says. While balancing the reward of taking on a new client with the risk of compensation should the advice turn out to be poor has been an ongoing consideration for advisers.
But, according to Apfa: “The growth of a compensation culture has had a considerable impact on advice firms from the cumulative effect of FOS compensation, FSCS levies and Professional Indemnity insurance. This has prevented firms from investing in greater capacity, expanding and innovating.”
In particular, it asks, there should be a question raised about the balance of what is compensable. For example, it asks: “Should those taking very high risks have the comfort of being bailed out by those making very low risk investments?”
Calling for a reform of the current system, Apfa said: “A balanced and comprehensive safety net needs to be designed involving the introduction of a longstop and reform of the FOS and FSCS.”
In particular, it says, both bodies should be governed by the same set of common law rules and legal principles and there should be a fundamental change in the scope of compensation within both FOS and FSCS.
“At the moment, consumers are compensated for non-regulated products because the advice is regulated. We believe that an unregulated activity should not be part of any regulatory body’s remit. There should be no compensation for people taking extreme risks. Such people should not be afforded the same protection if they are actively choosing higher risk investments,” it said.
