The ‘hidden costs’ of trading in a regulated market should be reviewed regularly

Weighing up the costs of running an advice firm is a constant in our sector, especially as those costs of doing business naturally rise and – very occasionally – fall, but mostly it’s the former.

Any impartial review of costs will probably include the determination of whether the firm has the most appropriate authorisation status, or it might look at the directly authorised (DA) alternative if they are an appointed representative (AR), or as our enquiries reflect, AR if they are DA.

We are speaking to a growing, proportion of DA firms who are not just concerned by the overt and increasing costs of running a business which is directly authorised by the Financial Conduct Authority (FCA), but also aware of the underlying and cumulative costs of being responsible for the advice given.

After all, most advisers rarely think about their digital filing cabinet full of ‘latent risk’ in terms of the potential for consumers to challenge the advice or to suggest dissatisfaction or even allege negligence by you; the regulated firm is on the hook for that legal and regulatory exposure, growing and multiplying each week you trade.

Understandably, this is one of the major benefits of being part of a network especially when we continue to see large scale shifts in regulatory rules and requirements which take a considerable amount of time, effort, money, and resources to meet.

We have had, of course, less than a year ago, the Consumer Duty – a significant progression in the regulatory landscape and one requiring ongoing and constant work on the behalf of regulated firms; a more significant imposition for a firm’s owner, without that network umbrella. In the eight months since the Consumer Duty implementation deadline, we have seen enquiries from DAs about joining Stonebridge almost double when compared to the eight months before the deadline.

So while we of course have to consider the obvious regulatory costs of doing business – FCA, FSCS, professional indemnity insurance, etc – all of which networks like Stonebridge fund on behalf of our ARs, there is also much to be said for the perhaps unseen, or ‘accumulating’, costs of having provided regulated advice – no adviser is off the hook after the sale and scrutiny of the quality or suitability of the advice can happen months and years later.

Not only is that latent and snowballing ‘advice risk’ exposure often overlooked and impossible to calculate in terms of the cost of it, but there are also direct and indirect costs relating to regulator interventions and dealings with the regulators. For ARs, this is largely performed by the network and for most AR firms it represents a significant cost saving, because the thought of having the direct financial and legal exposure resulting from direct authorisation would be expensive and simply too stressful.

Some DA firms may think the cost of the security and safety of network membership comes at a cost they can swerve by doing the work themselves. However, how do you put a price on having years of ‘direct’ legal, financial, and regulatory exposure (with every piece of business you write) in an environment where regulation does not lessen, and where advice firms are being asked to do more and more?

Is it worth the perceived cost saving when you could instead have a network Principal who sits in front of you, in terms of all that regulatory and legal risk? Let’s not forget, in some instances, that risk can also lead to serious personal exposure (to fines, sanctions or even criminal proceedings) for the individuals concerned, not just for the firm itself.

What position would those individuals be in if they found themselves at the centre of any action by a statutory body against them?

There is much for firm owners to consider in today’s environment. It’s not just of course the financial services regulators that have the potential to provide pressure and work for advisory firms, but clearly client complaints including escalations to the Ombudsman Service can be an ever-present threat, particularly for those who go it alone, in the regulatory sense.

Just recently, FOS itself said it expects to see a “slight increase in complaints about mortgages”, with a particular focus on the higher interest rate environment we now have, the fixed-term products that are ending, and how consumers might wish to point a finger of blame, rightly or wrongly, at advisory firms for their situation.

As the market knows, FOS does not see mortgage advisory firms as a huge or significant threat, but complaints made to the Ombudsman always cost, both in monetary terms and human resources, especially if any of those complaints are upheld.

The Ombudsman has also said, in a warning from stakeholders, that more complaints could arise as a result of the Consumer Duty, and again it is here that DA firms might rightly feel more exposure, given this is still a relatively new regime and they will not have had the support or roadmap of a network for whom it is in their very best interests that all its advisory firms are on the right path.

Therefore, when weighing up those financial and legal costs (real money today, as well as that snowballing of latent advice and negligence risk, in your digital filing cabinet), advisory firm owners really should look at the fundamentals of the business.

Start with your authorisation status, and consider what you can achieve within a network, what technology they provide, what lender and provider product propositions you have access to, but also what costs are covered – both fees and charges which apply in the here and now – but also those ‘latent’ or inherent advice risks which give rise to future liabilities.

Seek legal and regulatory protection where you can get it, particularly in an industry where the regulatory burden continues to grow. Robust and proven support can make all the difference and will help you make the right decision. Getting this right will make your firm more profitable and positioned for growth, without much of the direct exposure which some firms face.

Rob Clifford is chief executive of Stonebridge