The cost of regulation | 2013 report
Introduction
One question that is often asked is: "What is the cost of regulation for adviser firms?"
Whilst we know the total amount of direct fees that the sector pays in respect of the FCA,
FOS, FSCS and MAS, there is no reliable data available about the indirect costs of regulation
and compliance.
APFA therefore decided to conduct a survey about the costs of regulation that firms have to
pay, so we can begin to monitor the direct and indirect costs of regulation being borne by
the market. We will repeat the survey next year so we can start to build up a picture of the
impact of costs on the sector over time.
This report summarises the findings of our research into the cost of regulation in 2013. We
would like to thank all those firms who completed our survey, and we hope that the sector
will continue to support us as we seek to shed more light on the impact regulation has on
firms and consumers.
Summary of the research findings
Our research found that on average, smaller firms are spending 12% of their income on
direct and indirect regulatory costs. Of this, 3% is spent on direct fees and levies, and 9% on
indirect costs.
With total revenue earned from all regulated business done by financial advice firms in
2013 amounting to £3.8 billion, this means the sector spent an estimated £460 million on
regulation in 2013.
Assuming these costs are all passed on to the consumer, we estimate that the average client
is paying in the region of £170 each year towards the cost of regulation.
More details about the findings from our research can be found below.
What proportion of turnover is spent on regulation?
Our research found that smaller firms are spending, on average, 12% of their income on
direct and indirect regulatory costs. Of this, 3% is spent on direct fees and levies, and 9% on
indirect costs.
2|
However for the smallest firms, the percentage increases significantly to around 19% - 20%
of revenue, with indirect costs accounting for 16%. Figure 1 shows the direct and direct
costs for firms with income up to £1 million, analysed by firm size.
The largest element of indirect cost is the amount spent on internal compliance staff
and/or external compliance support - on average, compliance spending amounts to 5% of
revenue. For the smallest firms, the percentage spent on internal compliance staff and/or
external compliance support is generally higher, reflecting the fact that these firms generally
have to rely more on external support rather than having their own internal compliance staff.
Figure 1: Direct and indirect costs as a percentage of revenue, analysed by firm size
These findings are supported by research carried out recently by Aviva1, which found
that 26% of respondents estimated that they spent between 5% and 9% of turnover on
regulatory costs, 34% estimated they spent between 10% and 14% and 15% estimated they
spent between 15% and 20%.
How much is regulation costing the financial advice sector?
Based on the findings from our research, we have estimated the annual cost of regulation for
the financial advice industry in 2013.
Aggregated RMAR data from FCA shows that the total revenue earned from all regulated
business done by financial advice firms in 2013 was £3.8 billion2. If on average firms are
spending 12% of their revenue on regulation, this means approximately £460 million was
spent on regulation across the sector in 2013.
1
2
Aviva Adviser Barometer March/April 2014
"Financial Adviser Market : In Numbers" Edition 2,
published by APFA in April 2014
|3
How much is regulation costing the consumer?
We have also estimated the impact regulation has on the cost of advice for clients.
Data from NMG's Financial Adviser Census shows that on average an adviser has
approximately 125 active clients. With 22,000 advisers in the market this means
approximately 2.75 million people are being advised on a regular basis. Assuming the annual
cost to the industry of £460 million is passed on to clients, then each client is paying an
average of £170 per annum to cover the cost of regulation.
In making these calculations, we recognise that it is not possible to derive a precise number,
as we have had to make a series of assumptions in arriving at our estimates. However we
believe these estimates give us an indication of the order of magnitude i.e. each client is
paying well over £100 a year to cover the cost of regulation being borne by advisers.
Adviser viewpoint
As part of our research, we asked advisers for their views about the cost of regulation.
The general consensus amongst respondents was that both direct regulatory costs and
indirect costs - particularly PI insurance - have been increasing steadily over recent years.
Many also commented on the increasing amount of time spent keeping up to date with all
the policy statements, reports and statements issued by the regulator. For some businesses
this has meant having to take on extra members of staff or "lose" an adviser simply to ensure
everyone in the firm is kept up to date with regulatory issues.
A number of advisers also commented on the RMAR - an issue that APFA has been lobbying
the regulator on for some time. There was a feeling that a lot of the information was asked for
"just for the sake of it" and it was hard to see what use the regulator made of it. There was
also frustration that the regulator did not require information to be provided using standard
accounting practices, and therefore time had to be spent providing data in a different format
to that which the firm used itself.
Many firms commented that it was difficult to fully quantify the cost of regulation for their
business. It wasn't just the visible impact that needed to be considered, such as the amount
of time spent on reporting and keeping up-to-date. There was also the knock on effect of
having less time to spend with clients and a resultant loss in revenue, which is harder to
quantify.
One firm drew attention to the substantial costs that can be incurred if the FCA launches
an investigation - even if the firm is subsequently found not to have breached any rules.
Significant costs were incurred both directly, when the firm sought legal and compliance
advice to help address the questions being raised by the regulator, and indirectly because
of the staff time that was needed to deal with the queries - time that could not therefore be
spent with clients.
4|
So the overwhelming message from advisers is that it's not just the more obvious costs of
regulation that affect consumers, there's also the hidden cost of the time that is lost and so
can't be spent with clients. It's not just existing clients that it affects; it also reduces the firm's
capacity to grow the business, so clients who want advice at a price they can afford may not
always be able to access it.
Conclusions
Firms need to be able to operate in a sustainable way in order to be able to offer affordable
advice to those consumers that want it. Whilst some costs are within a firm's control,
a significant amount of their costs arise directly from regulation. This includes the fees
and levies firms have to pay, the indirect costs such as regulatory reporting and ensuring
compliance with the rules, and the consequent loss in revenue as a result of the time spent
complying with regulatory requirements.
The regulator therefore needs to be more focussed on finding ways to reduce the burden on
firms, rather than increasing it.
APFA believes more could be done to reduce regulatory costs including:
• Reducing reporting requirements - whilst some changes have been made to the
RMAR, there is still scope for the FCA to make further changes.
• Slimming down the rule book - much of the cost incurred by firms arises as a direct
result of the complexity of the rule book and surrounding guidance.
• Introducing a longstop to help reduce the cost of PI.
• Cutting fees for advisers - the FCA should re-open its review of the way its costs are
allocated, as advisers are still paying a bigger share of its costs than either the banks or
the insurance industry.
• Reducing the minimum fee payable for consumer credit - adviser firms should not
be paying annual fees of £300 for consumer credit when the credit activities they conduct
are negligible.
• Reducing the FSCS threshold for investment intermediaries - the FSA's case for
increasing the FSCS threshold assumed that revenues will not fall below 2010/11 levels
following RDR. We are monitoring the financial impact of RDR and if appropriate will be
asking the FCA to reverse the increase in the FSCS threshold.
Methodology
APFA conducted in-depth surveys with 74 adviser firms between March and May 2014. We asked advisers
to estimate how much they spent each year both on direct regulatory fees (FCA, FOS, etc.) and on indirect
costs such as compliance, reporting, management time etc. We then used this information to estimate what
percentage of firms' turnover was spent on regulation, the total cost to the industry and how much regulation
adds to the cost of advice for the average client.
|5
Association of
A
F A
Professional Financial Advisers
About APFA
The Association of Professional Financial Advisers (APFA) was launched in September 1999.
Our role is to effectively lobby the Treasury, FCA, government, the EU and other opinion
formers and policymakers to ensure the regulatory and business environment is positive
toward members. It is APFA's objective to play a critical but constructive role within the
regulation process - offering insights from the "front line" of the market. APFA is a
non-commercial, not-for-profit trade body. It exists solely to bring about a better business
environment for our members so they can continue to serve their clients.
APFA
26 Throgmorton Street
London
EC2N 2AN
Telephone: 020 7628 1287
Email: info@apfa.net
Web: www.apfa.net
twitter.com/official_APFA
www.linkedin.com/company/association-of-professional-financial-advisers
www.youtube.com/user/officialAPFA/
Ref: APFA-CR-06/14