The Association of Professional Financial Advisers (APFA) found, on average, smaller advice companies are spending 12% of their income on the costs of regulation – only 3% of which is on direct fees. APFA added, with all business by financial advice firms amounting to £3.8bn in 2013, this 12% represents £460m.
Furthermore, assuming these costs are passed on to the end client, APFA estimates the average clients is paying in the region of £170 each year towards the costs of regulation.
Chris Hannant, director general at APFA, said: “As individuals face greater responsibility for managing their financial affairs, they will need affordable advice. It needs to be easier for advisers to operate and serve their clients.
“This isn’t about compromising on standards, this is about cutting the burden of compliance and the cost to clients.
“A lower cost of regulation could also help bring professional financial advice into the financial reach of a greater proportion of the UK’s population – a desirable goal given the changes to the retirement market announced in the last Budget.”
The research also found the regulatory burden is bigger for smaller firms. For those with annual income between £100,000 and £250,000 the cost of regulation equals 19% of their income, and for those with annual income below £100,000 it is 20%.
One of the biggest indirect costs of regulation is professional indemnity insurance, which APFA said has been “increasing steadily over recent years”, although it was the less tangible costs – such as time spent keeping up to date with changes – which seemed most damaging.
In its report (available here), APFA suggested a number of ways in which costs can kept down and the client protected from picking up the tab – see below.
Hannant added: “APFA has written to the Financial Conduct Authority with a summary of our findings and a list of areas it needs to address.
“Good compliance is essential for the industry and for consumers, but the overwhelming feeling at present is that the regulatory burden on advisers is bloated, unnecessarily onerous and potentially damaging to the future health of firms.”
Suggested areas to address:
- Reducing reporting requirements – while some changes have been made to the RMAR, there is still scope for the FCA to make further changes.
- Slimming down the rule book – much of the cost incurred by firms arises as a direct result of the complexity of the rule book and surrounding guidance.
- Introducing a longstop to help reduce the cost of PI.
- Cutting fees for advisers – the FCA should re-open its review of the way its costs are allocated, as advisers are still paying a bigger share of its costs than either the banks or the insurance industry.
- Reducing the minimum fee payable for consumer credit – adviser firms should not be paying annual fees of £300 for consumer credit when the credit activities they conduct are negligible.
- Reducing the FSCS threshold for investment intermediaries – the FCA's case for increasing the FSCS threshold assumed that revenues will not fall below 2010/11 levels following RDR. We are monitoring the financial impact of RDR and if appropriate will be asking the FCA to reverse the increase in the FSCS threshold.