The cost of being regulated continues to grow, with sensible and responsible firms still having to bear an increasing cost for the regulatory family.
By law, we have to financially support the Financial Conduct Authority, the Financial Ombudsman Service (FOS), the Financial Services Compensation Scheme and the Money & Pensions Service; in addition, we have other groups all adding their view on ‘enhanced’ standards, all wanting to charge firms cash to make them better.
Paying attention to cost and liability will be essential
With the drives from the Equity Release Council, the Chartered Insurance Institute and The Investing and Saving Alliance, combined with others such as the Financial Services Culture Board, the Lending Standards Board and the Business Banking Resolution Service, there appears no end to bodies that have a view on how we need to treat customers.
However, it is the annual invoice from the FCA that tends to focus minds most. This year a number of big changes are proposed for advice firms. We await the final rules with interest, having heavily challenged some of the changes. For mortgage and protection firms, the percentage increase will depend on your size, complaint level and structure.
I remain infuriated by the assumption that advisers simply can afford to pay more.
Sharing the load
First, it appears cryptocurrency firms cannot afford the cost of new regulation. So this will be shared across those with a ‘money laundering’ responsibility. Under the proposed definition, that includes mortgage advice firms. It’s not a huge amount but big enough — to be followed next year with the same argument for funeral plan providers.
The scale of the challenge facing the industry is huge. The Consumer Duty and Fair Value entail the pressing of the reset button
Second, the minimum fee for small firms will increase from £1,151 — to £1,750 (52% increase ) in 2022 and to £2,200 (26%) in 2023. This is being offset for firms that also hold a consumer credit permission with no income, with that fee (previously £750) being included in a new, combined minimum fee. So some respite for mortgage advice firms.
If you are a network principal, the fee you are charged for each appointed representative is to go up from £250 to £286 (15% increase), with the introducer appointed representative fee increasing to £86 from £75. In addition, the fee for submission of any Long-Form A is being introduced at £250 each. A tax on this business model.
The findings in the recent Consumer Panel report on equity release do not make pleasant reading
The fact the FCA sees the need to increase its budget by 7.3%, despite previously committing to control its cost growth to 2%, does not imbue confidence. The FCA Board approved just passing on the increased National Insurance costs we all face to advice firms, without any evidence of prioritisation, which is a concern.
Mortgage advice firms see only a 5.4% rise in their base fees, but this will be supplemented by other costs.
Not in the same invoice, the changes at the FOS will affect many such firms. The reduction from 25 free cases to only three means more firms will have to pay £750 for each case considered. For some this could add significantly to their annual costs, often to defend a vexatious complaint.
Compensation scheme
Last, there is the biggest variable, the compensation scheme element. The issues here are still led mostly by the investment advice and pension sectors. However, we are hopeful that invoices will be the same in 2022/23, but it is inevitable we will see bigger bills thereafter unless we get a new funding agreement.
Having said this, the FCA has delivered its three-year strategy and business plan for 2022/23. It is a significantly more sensible read than before. The expectation is that volumes of complaints and claims will reduce as the regulator drives out poor behaviour.
This has to be seen as positive and is much clearer than the somewhat vague series of ‘Mission Statements’ from the Andrew Bailey era.
The fact the FCA sees the need to increase its budget by 7.3%, despite previously committing to control its cost growth to 2%, does not imbue confidence
Finally, the scale of the challenge facing the industry is huge. The Consumer Duty and Fair Value entail the pressing of the reset button. They will add more bureaucracy and cost. Also, the findings in the recent Consumer Panel report on equity release do not make pleasant reading.
Yes, it’s a sample skewed to the vulnerable, but we do not look good and there has not been enough learning from the FCA work two years ago.
Regulatory costs are increasing in what will be a challenging time for consumers and firms. Paying attention to cost and liability will be essential.
Robert Sinclair is chief executive of Ami
This article featured in the June edition of MS.
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