The ever-increasing regulatory and compliance burden that financial advisory firms have been shouldering for the better part of a decade shows no signs of abating.
This year alone, the Financial Services Compensation Scheme (FSCS) revealed that, for the first time ever, industry levies will exceed £1bn ($1.4bn, €1.2bn) for the 2021-22 financial year.
The staggering sum is the result of skyrocketing compensation paid to consumers and investors that has virtually doubled year-on-year for the past few years.
But how sustainable can the current model be in the long term, and how prepared are advisory firms to comply with it?
International Adviser polled 51 advice businesses in the UK, the vast majority of which (84%) said their firm can financially cope with rising costs; including regulatory fees, levies and professional indemnity (PI) cover.
Only 16% believed they may not be able to continue operating if costs spike again.
Such confidence, however, was paired with concern about the knock-on effect for clients.
Not sustainable
Several respondents said that while they can, and will likely be able to continue to, foot such bills; this may not be the same for smaller industry players who are not only are seeing their contributions grow every year but have been more heavily impacted by covid-19.
The current model was branded “unsustainable” by one respondent, with many echoing that view.
And it’s not just firm profitability that is taking a hit, with some advisers already forced to pass these costs on the clients, making advice less affordable for them.
But respondents also offered a potential solution: namely, capping fees by inflation.
‘No choice’
One respondent highlighted the unfairness of how the fees are calculated by the regulators, stating that if advisers were to charge their clients in the same arbitrary way, they would probably be on the receiving end of some hefty sanctions.
A common sentiment among UK advisers is that they don’t have much choice. If they wish to continue working in the industry, paying levies is part and parcel of the requirements.
While many remain confident of their ability to keep meeting the financial demands of the regulators, it risks undermining the government’s stated objective of making financial advice widely accessible and affordable.
This could then result in the creation of a far bigger advice gap.
