The increasing costs of regulation


Article by Phil

Financial Advisers are once again facing increases in the costs of regulation.

Advisers are regulated by the Financial Conduct Authority (FCA) who authorise firms via granting what are know as permissions to perform controlled (or regulated) functions, like advising on investments, pension transfers, mortgages etc. Those permissions are granted to firms based on their ability to demonstrate to the FCA that they have the systems and controls in place to be able adhere to the FCA’s Conduct Rules and of course that firms have properly qualified individuals to provide the services. The principle is that these controls are in place to protect consumers and give them confidence that they can deal with authorised firms and financial advisers safe in the knowledge that they are qualified and will act in the consumers best interests. In order to pay for the FCA, advisers pay an annual levy based on the value of their turnover in particular areas of advice. In addition, advisers also have to pay a levy towards the Financial Service Compensation Scheme (FSCS), which protects consumers in the event that they are mis sold or lose their investments through no fault of their own.

Both the FCA and FSCS are necessary to give consumers the confidence they need to trust the UK financial services market, however the costs of both are increasing way beyond the rate of inflation and placing increasing burdens on financial advisers. In addition, advisers are also required to pay for Professional Indemnity Insurance (PII), which is designed to insure against firms providing “bad advice” and having to pay out to clients, especially in cases where the adviser firms themselves no longer exist. Again, a necessary protection for consumers. The problem with PII, is that it is provided by a small number of specialist insurers (often underwriters at Lloyds) on an open market basis. When there are concerns (justified or not) about certain types of advice, for example pension transfers or mini bond sales, then the market can react by reducing cover or refusing to insure, which drives up demand and therefore prices. Since PII operates on an open market basis, there is nothing advisers can do to protect themselves.

Both the cost of PII and FCA and FSCS costs have been increasing at an alarming rate.

Between 2018 and 2020 the cost of our PII premiums has increased by 614% and the cost of our FCA fees have increased by 211%. When you add in the cost of the “tools” which we require to specifically deal with compliance, it costs us over £50,000 a year just to deal with compliance. These are direct regulatory costs and do not include any of the normal costs of business, including premises costs, staff costs, marketing, running costs etc.

As a result of these increases, along with many other adviser firms in the market, we have had to take the decision to change the way we charge our fees, which has inevitably led to an increase.

Whilst we remain very competitive compared to most advisers, the net result is that our fees have increased which means that will now cost clients more to receive advice.

There are other ways that the costs of regulation, particularly PII, FCA and FSCS costs could be dealt with and the Personal Finance Society are currently lobbying government to review the way in which these costs are collected. If they were collected from all investment companies across the whole of the UK market, the cost would only amount to as little as 0.006% of invested assets in the market. A figure so small that it would be felt in any meaningful way by any consumer. If that happened, advisers could seriously review advice costs for the benefit of clients.

We have recently written to our local MP Andrew Stephenson to voice our concerns and suggest that the Government urgently considers the situation. Here’s a copy of the letter:

Mr Andrew Stephenson MP

9 Cross Street



11th February 2020

Dear Andrew

Firstly, belated congratulations on your re-election, Phil and I were sure it was never in doubt!

I’m writing to you along with many Independent Financial Advisers across the UK who are also writing to their MP’s, to highlight the crisis looming across the advice industry as a result of crippling increases in regulatory costs.

You will remember opening our new offices in Barrowford only last year, which we needed as a result of our business expanding to serve well over 200 local clients with financial advice and to accommodate our increased workforce of seven employees. Sadly, I have to report that this expansion is under threat.

In the last two years our regulatory costs have increased by 211% to almost £50,000 per annum (excluding any staff costs to dealing with regulation). That includes an increase in our Professional Indemnity Premiums (PII) of 614% and an increase in our FCA fees of 397%, despite us never having received one single complaint from any of our clients. With the latest additional demand from the Financial Service Compensation Scheme (FSCS) dropping through our door in January, we have had to take the decision to increase our advice fees.

We’ve done this with great reluctance as we are acutely aware of already high costs of professional financial advice, especially to clients in our area, but we simply cannot afford to absorb these increases in costs ourselves any longer.

I know that you understand our market from your past experience and I’m sure you are aware that as far back as 2016, the Financial Advice and Markets Review found that, ‘the unpredictable nature of the Financial Services Compensation Scheme (FSCS) levy makes it hard [for firms] to plan effectively.’ It also reported on ‘problems which smaller firms experience in obtaining adequate PII at an affordable price.’

Since then the situation has become critical and will ultimately result in a change to pension freedoms and the wider availability of advice if not addressed.

My professional body, the Personal Finance Society (PFS), has developed a solution to these issues. Under their plans, consumers would still get the same level of compensation they are entitled to today.

However, instead of compensation being paid from the current patchwork of professional indemnity insurance and levies to the Financial Services Compensation Scheme, it would be funded from both the market and a levy on the £9 trillion of retail assets managed by the UK investment industry.

The Personal Finance Society has calculated that this levy – which would pay all existing compensation and fund pro-active consumer education through the Money and Pensions Service, would only be c0.006% of current assets under management.

The hardening of PII is impacting the availability of advice to consumers, who must take regulated advice to be able to exercise their rights over defined benefits pension transfers. An even bigger concern is the removal of cover for past advice already given, which will have an even greater impact on consumer protection levels, an already broken FSCS and the advice sector more widely.

More needs to be done to support public financial engagement and equally acknowledge that effective regulation and protection should provide the confidence to engage with the market. But without a vibrant, stable and sustainable market, the public will be left poorly served and more vulnerable to poor financial consequences and scams.

As I say, I’m sure you appreciate the situation and I would ask that you escalate our concerns to the relevant minister. This really is a serious matter, which is only getting worse and will cause serious consumer harm if the number of advisers continues to reduce at the current rate because of unsustainable costs.

I would be more than happy to talk to you about the impact on our business or indeed to any of your colleagues.

Please could you support me by considering the PFS proposals and raising our concerns.


Yours sincerely

Christina Clegg Dip PFS

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