Written evidence from Name Withheld [PPS0036]

 

The FCA is trying to “improve Consumer outcomes” but, as a result of its own previous inaction and failures, it is damaging the consumer and IFA firm of today.

Since about 2015 colleagues have been writing to those in authority highlighting how FCA decisions and the way they applied their own rules would affect the consumer very badly. In every instance where bad practice by different organisations was happening, both in the UK and abroad the FCA’s sole response seems to have been “make the honest ones pay”.

It’s hard to open a newspaper or turn on the radio without coming across complaints about pension freedoms and people’s inability to get at their money. Some of these complaints are about financial advisers refusing to give advice. Some talk of advisers charging large fees for any advice they are prepared to give.

Having refused to do so myself I can confirm that many advisers will refuse to give advice, I believe that “large fees” part is misleading. It is damaging our ability to advise people who actually need our advice and quite frankly I can’t see beyond blaming our regulators.

My firm has encountered the following over the last 2 years:

  1. Our PII costs have increased more than fourfold, from £9,000 to £42,000 per year, not because we have a track record of upheld complaints but purely because of actions taken by the Financial Conduct Authority.
  2. The costs of regulatory bills are now largely made up by Financial Services Compensation Scheme (FSCS) which means they total at £21,000 far more than our corporation tax bill.
  3. The indirect costs of compliance (where third parties assist in making sure that we are acting compliantly with FCA rules) has risen from around £6,000 per annum to almost £12,000 per annum and we are now paying for individual file checks on “defined benefit” scheme file reviews.
  4. We are now spending more time on risk analysis and assessment of this business, along with presentation of our procedures to third parties that is leading to us having to employ one person full time, not on advising consumers, but on meeting the requirements in order for us to retain the permissions to actually give the advice.

We advise on average on 20 defined benefit pension cases in a year. Our cost per case is now in excess of £4,000 because of points 1,2 and 3 above.

If you then consider staff and adviser time, we estimate the minimum cost per case for defined benefit or safeguarded schemes has risen over the last 3 years from around £1,000 to an eye watering £6,000, before any profit to the company is made.

As you can imagine, these costs must be passed on to the customer making financial advice unaffordable for those who need it most.

We have recently, sadly taken the decision to increase the minimum case size we will deal with, meaning that we can’t afford to advise the great majority of the population. Given the need for decent professional advice this is a potential disaster.

Not only is this unsustainable to us as a business, it is wholly wrong for the consumer, and with other barriers to obtaining advice, it is not surprising there is starting to be a consumer outcry about obtaining pension advice.

I should add that in 20 years in business we have not had a single complaint about a pension transfer advised. In 20 years, we have never had to compensate any client at any time with regard to pension advice.

If we do not have 20 clients in a year, and say we only action 10, then the baseline cost is £12,000 per client for costs that are wholly and directly linked to the actions and failures of the regulator the FCA. I can provide personal examples of where they were notified of companies and poor advice being given that they failed to act on, and we are now paying higher FSCS costs as a direct result.

The FCA in July published data suggesting that nearly all advice firms were now considering retiring from future advice in complex areas, and that profits were done across the industry in every sector in 2019 (before coronavirus)

 

I can only assume the FCA has some new people in management who have decided to show their effectiveness by imposing particularly Draconian rules after 1st October. I can remember many expensive bureaucratic changes caused by regulators over my 40 years in the profession but I can’t think of any more damaging to the consumer.

 

A client approaching retirement who has a serious illness which is almost certainly going to affect life expectancy who has a defined benefit scheme, of less than £250,000 is likely to find it nearly impossible, to obtain best advice.

The FCA are introducing rules for transfers which make it absolutely certain that someone in this position couldn’t afford the financial advice they so clearly need.

They have stated that the first part of the advice must be “non-contingent” which means we have to charge a fee for just looking at it, no matter what the outcome or recommendation is. To use our break even figures we would have to charge this client nearly 3% of the value of his pension fund before we pick up the file, of course this rule doesn’t apply to other pensions. However, the regulator says we have to take into account all pension income when advising a client, are we supposed to take on £6,000 extra liability and costs when advising a client who has personal pensions and defined benefits from a previous employment?

To break this down, we would have to charge an immediate fee of £6,000 + vat which would amount to £7,200 nearly 3% of the fund just to cover our PII, FSCS and other costs. I do not believe we can afford to do this at break even cost given the amount of time, experience and expertise required to advise on this sort of case. As you can see we are being forced to make the price of our advice unaffordable to the vast majority of the population.

It might have been that we could arrange for a considerably larger pension for this client due to his ill health, experience shows that the lump sum would be greater too. The problem is that the client is having to take a rather large leap of faith paying out a considerable sum of money on the off chance that his circumstances may be improved.

I understand the need for rules on pension transfers, the British Steel scandal alone shows that. I would say however that cracking down on the fraudsters (many of whom were reported to the FCA at the time I believe) would be a better way of dealing with the situation than making the honest advisers pay for the sharp practices of others. This of course might be a less easy way for the FCA to deal with the problem.

I’m sure that this legislation will be claimed to be effective because there will be fewer complaints. I’m also sure that the reason for the fewer complaints will be because much less advice will have been given, leaving most clients who need the advice high and dry. I believe there was an old joke in the medical community, “operation 100% successful, patient died” and I’m afraid we’re heading that way in UK financial services.

I could draw comparisons with other transactions, buying hi fi and having to pay the same whether you get a CD player or CD, amplifier and speakers comes to mind.

 

My own firm which has dealt with transfers for many years is now considering withdrawing from the market. Doing so will cause us to lose income and possible staff through redundancy but this would be healthier for us than taking on the extra costs and liability involved in staying in the market.

If you consider me to be a Cassandra predicting doom, please consider that she was proved to be right. I am not the only one with a pessimistic view of the way things are going.

Many of us were horrified when the FSCS started compensating people abroad, where the “advice” was given abroad and the adviser had never been regulated in the UK. This was after the regulator had been warned and names named while the fraud was going on.

Garry Heath, director general at the IFAA, has warned that consumers are now paying 20p in every pound of their advice fees for regulatory bills, which he said was only set to increase. Our own business is paying FCA, FSCS, PII and enforced regulatory costs including accountancy bills of in excess of 14% of turnover before expenditure or tax.

Consider HMRC and understand that tax raised by the revenue for both Corporation Tax and Employee tax or dividends, is being drastically reduced as a result of fees being paid to a regulator to compensate clients who do not even live in the UK. We are in a scenario where British tax take is being affected by FCA failures.

We are seriously considering our position here. We can only see the cost of regulation continuing to rise as the regulator carries on making up rules which allow boxes to be ticked but don’t really solve the problem.

Just have a look at the FCA’s own published figures on financial services sector by sector if you want to see the downward trend.

The last point I’d like to make is that the regulator is very keen on the concept of “treating customers fairly”, how can it be fair to price the vast majority of customers out of the market?

 

 

September 2020