The cost of being regulated continues to grow, with sensible and responsible firms continuing to have to bear an increasing cost for the regulatory family.  By law we have to financially support the FCA, FOS, FSCS and MaPS, in addition to which we have other groups all adding their view on “enhanced” standards, all wanting to charge firms cash to make them better.  With the drives from the ERC, CII, TISA combined with others such as the Financial Services Culture Board, Lending Standards Board, Business Banking Resolution Service, there appears no end to bodies who 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 there are a number of big changes proposed for advice firms.  We await the final rules with interest, having heavily challenged some of the changes.  For mortgage and protection advice firms the percentage increase will depend on your size, complaint levels and structure.  I remain infuriated by the assumption that advisers can just afford to pay more.

Firstly, it appears that cryptocurrency firms cannot afford the cost of new regulation. So, this will be shared across those who have a “money laundering” responsibility.  Under the proposed definition that incudes mortgage advice firms.  Not a huge amount but big enough, soon to be followed next year with the same argument for funeral plan providers.

Secondly, the minimum fee for small firms will be increasing from £1151, to £1750 (52% increase ) in 2022 and to £2200 (26%) in 2023.  This is being off-set for firms which also hold a Consumer Credit permission with no income, by 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 then the fee you are charged for each Appointed Representative is to go up from £250 to £286 (15%increase) with the IAR fee increasing to £86 from £75.  In addition, the fee for submission of any Long-Form A is now being introduced at £250 each.  A tax on this business model.

The fact that the FCA sees the need to increase its budget by 7.3%, despite committing to control its cost growth to 2% previously does not imbue confidence.  The FCA Board approved just passing on the increased NI costs we all face to advice firms without any evidence of prioritisation is a concern.  Mortgage advice firms only see a 5.4% increase in their base fees, but this will be supplemented by other costs.

Not in the same invoice, the changes at FOS will impact many mortgage advice firms.  The reduction from 25 to only 3 free cases means that many 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.

Lastly, there is the biggest variable which is the compensation scheme element.  The issues here are still mostly led by the investment advice and pension sectors.  However, we are hopeful that invoices will be the same in 22/23, but it is inevitable that we will see bigger bills thereafter unless we get a new funding agreement.

Having said this, the FCA has now 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 FCA drives out poor behaviours.  This has to be seen as positive and is much clearer than the somewhat vague series of “Mission Statements” from the Andrew Bailey era.

Finally, the scale of the challenge facing the industry is huge.  Consumer Duty and Fair Value is the pressing of the reset button.  It will add more bureaucracy and cost.  Also, those that have read the recent Consumer Panel report on Equity Release will know that the findings in the study do not make pleasant reading.  Yes, a sample skewed to the vulnerable, but we do not look good and there has been not enough learning from the FCA work two years ago.  It is time to step up and provide better options and advice for those borrowing into retirement.

Regulatory costs are increasing in what is going to be challenging time for consumers and firms.  Paying attention to cost and liability will be essential for all firms.

 

Robert Sinclair, AMI Chief Executive
May 2022