This makes the subject of consumer protection an especially important one to tackle.
With the recent arrival of our annual regulatory fees invoice (landing on Friday 13th - someone at the FCA clearly has a wicked sense of humour) I was prompted to consider how consumer protection is working.
The cost of protecting consumers in this regulated space is significant. The FSCS paid out more than £400m in compensation last year. The FCA budget this year is more than £500m. Add in the FSCS management expenses and running costs of FOS, and that’s more than £1bn a year being spent on protecting and compensating the financial services consumer.
And of course there is a lot more money being spent indirectly on satisfying this noble aim.
We renewed our professional indemnity insurance policy earlier this year, swallowing a modest premium increase and three-fold increase in the excess size for defined benefit transfer claims. Many of the advisers I’ve spoken to have recently experienced a 50% premium increase, relative to a rise in their turnover since last renewal.
A third layer of consumer protection exists in the form of capital adequacy, rising recently to the higher of £20,000 or 5% of annual investment business income.
In a perfect world, a failing IFA firm would call on its capital reserves in the first instance, to compensate its customers. It might then claim on its professional indemnity insurance, before finally being declared in default and dumping its liabilities onto the industry funded FSCS.
In practice, when firms fail they eat their capital reserves before customers see a penny. The regulator rarely acts swiftly enough to put a freeze on these assets. The professional indemnity insurer then deploys an exemption based on the liquidation of the firm, or indeed discovers the type of investment that was recommended was never actually covered by the policy.
So the FSCS is forced to step in, becoming the consumer protection of first resort, rather than last resort.
It makes this current duplication (triplication, actually) of consumer protection measures wasteful and more expensive than necessary.
Because consumers are ultimately the ones paying for our FSCS levy, professional indemnity insurance premium, and loss of profits from capital set aside to meet prudential requirements - as well as all of the indirect costs of regulation to a Financial Planning business - this is something we need to urgently address.
Dealing with this issue could make a bigger contribution towards closing the advice gap than any technological innovation. Dramatically reduce the cost burden of funding consumer protection and that allows for firms to lower their fees, improving access to advice.
But how can we collectively deal with it?
During the past three years, my firm has paid five times more in FSCS levy than it has towards the running costs of the FCA. This suggests that not enough is being spent on effective regulation, preventing consumer demand for compensation in the first place.
Directing more of our annual fees towards effective regulation should, if deployed well, result in a much lower FSCS levy.
There might not be much of an incentive to do much about this though. We all know how easy it is to spend other people’s money, which is essentially the role of the FSCS.
What could prompt a more meaningful reform than the current FSCS funding consultation (which seeks to allocate FSCS funding costs differently, still ultimately to be paid for by consumers) is greater awareness of how these costs are funded and how they currently reflect ineffective regulation. Shout it from the rooftops.
Martin Bamford FPFS Chartered Financial Planner SOLLA Accredited Later Life Adviser
Managing Director, Informed Choice