Mention the phrase ‘rising regulatory fees’ around any UK financial adviser and you’re likely to trigger a pretty strong response.
Paraphrasing their comments, they usually say something along the lines of: “Times are tough, business is challenging and the regulator is only making it more difficult for the good firms to stay afloat.”
And there seems to be no let up.
Back in April 2020, Phil Billingham, director at Perceptive Planning, took to social media to lament his PI cover rising by 400% despite no claims or DB transfers.
And his is not an unusual story.
International Adviser recently interviewed Phil McGovern, director of MPA Wealth Management, about rising regulatory fees and levies, and he said that the industry lacks a “real lobbying group” to help advisers.
So, what’s the solution?
‘Out of control’
“I spoke with our compliance auditors recently about [FSCS] charges increasing, PI cover and also DB transfers,” James Pearcy-Caldwell, chief executive of Aisa Group, tells International Adviser. “What they told me is that this is the primary subject of discussion amongst all IFA firms at the moment.
“And they said ‘this is going to put good firms that have never done anything wrong out of business’. I think that’s how severe this problem is at the moment, and I think the FCA do not recognise this.
“When you’re talking about DB transfers and PI insurance, I think they haven’t gone into this with an outlook of trying to target companies that have been causing the problems with defined benefit transfers.
“Rather, they have just elected to go in there in such a way that they are looking to target all companies that are doing defined benefit transfers without differentiation between good and bad, or those that have now left the industry or phoenixed.
“I’m not saying they’re so non-arbitrary, that they’re putting everyone out of business, but they are hiking the premiums on everybody.
“That is completely non-arbitrary. Everybody’s paying more and everybody is being tarred with the same brush. I think the way in which the FCA has gone into the whole of this is not arbitrary. To be honest, I think the regulator is out of control, that’s my personal belief, and answers to no-one.”
Not hit the peak yet
Pearcy-Caldwell also believes that “lack of resources” is a problem for the FCA, which makes fighting this industry issue a real challenge.
“When you look at the FSCS bill, you can look at that in a separate medium, but you’re talking about firms like mine, which have been around for 21 years, that are watching PI costs and FSCS costs go up by 400% over two-and-a-half-year period,” he added. “That’s insane and it’s only going to carry on going up at the moment.
“There is no respite, as we haven’t hit the peak yet. When the FCA says, regarding changing FSCS funding, it will be a last resort, and they don’t believe that it should be funded by product levies, etc., they’re missing the point.
“You’re going to have advice levies because you’re in a situation where firms can’t afford to carry on just absorbing these costs.
“They can only get rid of so many staff. If your PI and FSCS costs are like ours, which are now £70,000 ($90,815, €77,447) a year, either you can get rid of staff or invest less for the future, or charge clients more.
“I have heard of other firms talking about applying a regulatory levy to clients and their advice.
“Overall fees go up, whilst you’re paying less corporation taxes on lower profits, employing less staff with less receipts into the Treasury, for compensation in the regulator’s name.
“The regulatory failures of the past are leading to us having to pay compensation for their errors and failings.”
Control over the regulator
Many people in the industry have started turning to their MPs to help.
But unfortunately for advisers, it is unlikely that government or parliament will step in.
A letter, seen by IA, written from John Glen, economic secretary to the treasury, to Kerry McCarthy MP on 25 September 2020, says “although the Treasury sets the legal framework for the regulation of financial services, it has strictly limited powers in relation to the FCA”.
“In particular, the Treasury has no general power of direction over the FCA and cannot intervene in individual cases,” Glen added. “The independence of the FCA is vital to its role.
“Its credibility, authority, and value to consumers would be undermined if it were possible for the government to intervene in its decision-making. However, I hope the following information is helpful.”
Pearcy-Caldwell believes that the regulatory system needs a revamp.
“There is no way to campaign,” he said. “We’ve actually been campaigning directly with MPs since 2016 and saying that we will get to exactly where we are now, and they have achieved nothing.
“I said that unless the FSCS is reconsidered, and the FCA start taking action against firms that are clearly not operating in the best interest of clients, then you combine the two things together, and ultimately, you’re going to end up in a situation that we are in right now.
“The trouble is the regulator’s remit is not only consumers, but it is actually there to promote financial services and financial service firms, and also promote a sound industry. I do not see them doing that. Destroying or inhibiting good firms is not good for consumers.
“A single regulator, which is too large, is trying to do every part of the job, and actually has got its own conflicts of interest, effectively, because of that.
“I think the solution to the problem is you effectively do need another regulator to ensure that the regulator is retaining its remit for the industry. So, it’s not simply looking all the time at consumer detriment as being the sole responsibility.”
Resurrect the industry
There are a lot of issues facing the industry, but according to Pearcy-Caldwell they can be put right.
“I think with Brexit there is a massive advantage,” Pearcy-Caldwell said. “First of all, the Financial Ombudsman Service and the FSCS when they were set up were originally UK ideas and they were targeting UK residents and regulated products only.
“And I absolutely think that’s where we should go back to. The FSCS has paid compensation for non-regulated products sold by non-regulated advisers to non-residents and the regulated UK industry picks up that bill.”
Christopher Woolard, then-executive director of strategy and competition at the FCA, wrote a letter in 2017, seen by IA, to Claire Perry MP, and admitted that the regulator knows that FSCS levies “will be due to claims made by overseas consumers or against firms” abroad.
Woolard added: “As the economic secretary has pointed out in previous correspondence, we are considering FSCS funding at the moment, and as part of that we are exploring ways in which, when things go wrong, the FSCS bears less of the cost, with more falling on firms’ own professional indemnity insurance.”
Also, Pearcy-Caldwell believes that there needs to be an “oversight of the regulator that must actually look at the industry outcomes as well”.
“We need to have an industry voice at the table, where members of the sector, from small firms to big ones, maybe in regions, are able to feed directly into an intelligence unit, but also provide solid feedback on regulations that are being imposed,” he added.
“I think it would serve two purposes, you’d have feedback on the regulation, to say from a pragmatic point of view, whether it is functioning, and second of all, it would allow solid feedback on what is happening within the industry.”