26th April 2012

There must be some kind of way out of here

“There must be some way out of here, said the joker to the thief, there's too much confusion, I can't get no relief”. Dylan and Hendrix were right.

It was reported recently that there was a bulge in the number of adviser firms who were having permissions withdrawn because they had failed to pay their regulatory fees.

This report resulted in an interesting theory evolving that it could be because it was a very effective and nil cost way of exiting an industry, shortly to become a profession, which they have had enough of.

The fees in question for some of the most recently departed were less than �£2,000.

IFA Minesh Patel was quoted as saying: “The FSA are very clear about what their fees are and when they are due. It’s actually a very clear and transparent system”. He went on to observe

Why are people having their permissions removed? The FSA would have given them ample warning. It’s a way to exit the industry in a kind of underhanded way.

I think the FSA will take a much harder line on it, and more IFAs will have their permissions removed. Am I sympathetic? Not really.

One-man bands who can’t contribute to the industry, there is no place for that type of person in the industry. It’s better that that type is weeded out earlier rather than later”.

Strong words indeed.

And although he may have a point, the problem is that he is in so many ways wrong.

The FSA has no concept of cost but every concept of spend. To fuel this spend it needs money, your money in fact anyone’s money will do as long as it is there when needed.

IFAs are not at all clear about overall fee levels because regulatory subscriptions are one thing, levies and various other unexpected and by default unbudgeted costs are not. For small IFAs this is a massive fiscal fear.

He is not correct in saying that the firms will have been warned well in advance because some levies come with very little warning indeed. Take FSCS levies as a highly contentious point.

Only last week we saw Informed Choice’s campaign for a fairer FSCS attract over 1,400 signatures on an online petition to highlight the unfair and unpredictable nature of the current not fit for purpose model. Whilst the outcome is sadly predictable, unless efforts are made nothing will ever get done.

IFAs should remember the famous Pastor Martin Niemoller text:

First they came for the Communists and I did not speak out because I was not a Communist. 
Then they came for the Socialists and I did not speak out because I was not a Socialist. Then they came for the trade unionists and I did not speak out because I was not a trade unionist. Then they came for the Jews and I did not speak out because I was not a Jew. Then they came for me and there was no one left to speak out for me.

Perhaps that is the regulatory game plan for the smaller IFA, as every other effort so far to get rid of them has failed?

A death by a thousand financial cuts, price them out by way of huge unfair and unbudgetable costs, change the business model, inhibit trail income, make PI difficult to get due to the uncertain and unpredictable retro application of regulation as is seen by the withdrawal of Chubb from the market this week.

We should all remember that small firms are often poorly resourced financially to deal with the punitive and escalating costs of regulation. This is of course why many have found the network route attractive.

Such firms are often sole traders or unincorporated partnerships, their balance sheet is their own total wealth and the result is that their liability is matching it.

For these individuals to try a John Stonehouse” and simply swim off into the horizon is a risky move and by no means an easy method of erase and rewind.

But it may indeed be for those heartily sick of it all where I suspect such an exit strategy is often based upon a case of “can’t pay” rather than “won’t pay”.

This should not be about “weeding out” those within, it should be about finding a way for those who wish to operate a legitimate and honest business in the regulated world we live in to do so with confidence in regulation and the regulator.

The regulator, according to the Regulators Code, should also “consider the impact that their regulatory interventions may have on economic progress, including through consideration of the costs, effectiveness and perceptions of fairness and of regulation. They should only adopt a particular approach if the benefits justify the costs and it entails the minimum burden compatible with achieving their objectives”.

Right now that is not the case and this will no doubt be a driver to those firms who have had enough and do not wish to pay the cost for a correct and orderly exit.

Again Bob & Jimi were right, "There are many here among us who feel that life is but a joke”, and that joke is the spiraling cost of regulation - even to escape it.

FSA/FCA, Panacea Comment