The good firms have to pay for the crimes – and that is not too strong a word – and misdemeanours of the minority who do not trade to the same high standards
Bob Hunt is chief executive of Paradigm Mortgage Services
Faced with a list of costs that come with running a small business in the UK, many owners will only set aside what is absolutely necessary for contributions to the regulatory structure they work within. Indeed, for some firms, there are zero costs if the business is unregulated, while for others there are some sizeable payments required in order to keep working within the legal structure.
For the most part, these costs are fixed, or at least known at the start of any given year; increases (if required) are usually reasonable and can be worked into the overall budget. This is not of course the case in the financial services market where many firms have had additional regulatory costs pushed onto them, sometimes with no notice period at all. Unfortunately here the good firms have to pay for the crimes – and that is not too strong a word – and misdemeanours of the minority who do not trade to the same high standards.
It’s a situation that leaves many smaller advisory firms not just baffled but potentially out of pocket on a regular basis, and I get the sense there is a growing resentment at the environment that deems this acceptable. Just last week HSBC’s UK head and also the chair of the FCA’s Practitioner Panel, Antonio Simoes, told MPs on the Treasury Select Committee that the Financial Services Compensation Scheme levy is having a disproportionate impact on smaller firms in particular.
He suggested the levy that smaller firms had to pay each year was unfair and that the overall increase in regulatory costs – the FCA’s Budget was increased by 7.9% this year – was ‘unsustainable’. There is certainly an argument to be made here about the burden of regulation, not just in terms of the new rules and requirements that are brought in each year, but the ongoing cost of ensuring compliance with these and, in general terms, in maintaining a firms’ ability to keep on trading.
I have to agree with the assertion that regulatory costs cannot continue to only go in one direction; that you cannot continue to squeeze regulated firms, particularly the smaller ones, without there being some notable negatives as a result. In the case of our market, I suspect firms will simply shut up shop, and perhaps look more at unregulated sectors, if they felt they can no longer carry on paying the price of regulation. This can’t be right, especially given the post-credit crunch drop in adviser numbers, at a time when advice has perhaps never been more in need.
‘Regulatory dividends’ are often talked about in this type of conversation, but there appears to be little chance of their delivery in the months and years to come. I suspect good firms are not suddenly going to be let off the hook when it comes to funding the fallout from the problems generated by a minority of their peer group. It would be nice but it’s not going to happen.
However, there is a chance to reduce the regulatory burden for all firms, specifically the smaller ones, if those fines issued by the FCA are not simply placed into the overall taxation pot, but genuinely used to cut regulatory costs. We have seen some huge figures recouped by the regulator over the past few years – indeed in 2014 alone banking fines came to well over £1bn. This money has not been used to cut the costs of running our regulator, nor has it been used to deliver a discount or wholesale cut for those firms playing by the rules and running a well-delivered and fully accountable service. And that is a great shame.
Instead, the growing cost of regulation, the new costs that come with new services such as Pension Wise, are still being placed at the door of regulated firms who each year have to find this extra money. There appears to be an opportunity to change this system and to allow firms the breathing space they need in terms of funding those costs. It might also be a time to provide ‘breathing space’ in terms of the level of regulatory change our market is subject to each and every year, but as the old saying goes, ‘Regulators regulate’ and there appears no firm likelihood of this.
However, in this market, a gesture and reallocation of the money from fines could go a long way. It will keep firms interested and engaged and will ultimately show that it is not all one-way traffic when it comes to regulatory costs. It will send a message to good firms that they are valued and they are appreciated for their compliance, and it will ultimately mean the good need not fund the mistakes of the bad. There are positives to be gained here for everyone, not least those smaller firms who are being subjected to costs far and beyond what they should reasonably be expected to cover.
