Chapter five of the depolarisation policy statement reveals changes to the Financial Services Authority's cost benefits analysis after receiving responses to CP04/03 and which increase the overall cost of the financial advice depolarisation process.
Several post-consultation changes to the draft rules published in CP04/03 will have a major impact on the costs or benefits set out in CP04/03 and CP166, says the FSA.
As a result, the cost of implementing depolarisation reforms has doubled to £28m for tied firms and £13m for independent advisers.
That said, there is still some confusion as to total figures in the CBA, as laid out by the FSA.
The following costs which respondents said should have been included previously look at:
The FSA, however, stipulates all these areas have now been included in the final total.
Respondents believe the FSA also underestimated the time it takes to run through the advice process, because of the need to explain the remuneration options and the menu to clients.
FSA says while there were only a few of these respondents, the variation differs greatly, leading to an average added time estimation of around six minutes.
With time comes money, and a few respondents said: “While initial costs per client may be higher, on-going costs for existing clients will be lower (as they expected clients familiar with the menu would require less explanation,” according to the FSA.
In the CP04/03 CBA, the FSA estimated the costs of the menu in terms of adding time to the sales process would be £14m and £6.5m a year for firms that are currently tied and independent respectively. This was based on an average added three minutes to the sales process, and included the cost of consumer time.
FSA says a revised average estimate fot time and money soent to explain the menu is higher than the estimate in CP04/03, as research suggests advisers already discuss remuneration options with clients and some of this conversation will now be provided within the context of the menu.
The FSA recognises, though, the menu may lead to an increase in the length of this discussion and that the menu itself will need to be explained.
With the revised time of six minutes, compliance costs are therefore doubled to £28m and £13m for firms currently tied and independent respectively, and this includes the cost of consumer time aswell.
The FSA again says it provides a calculator for firms wanting to work out their maximum commissions.
The CP04/03 CBA reveals a possibility that the cost of advice might lead to a false focal point, even though it is only one part of the total product cost.
The FSA says many respondents were concerned about this happening, while also suggesting that a cost of advice focus – ‘where the quality of advice was unobservable, and assuming the cost of providing advice and the quality of advice are positively related’ - may encourage advisers to reduce quality to lower costs.
Adviser firms negotiating higher commissions without sharing these costs with consumers may appear ‘less competitive’ when compared with their competitors.
While the menu may put pressure on commissions - giving some advisers the ability to exit the market - the FSA says this is unlikely to be the dominant force of market exits, with costs as a result of reduced competition expected to be ‘marginal’.
A further area of concern pointed out was that of market average facilitating 'tacit collusion' between firms on cost of advice.
The FSA says this potential cost was identified in the original CBA and compatibility statement sections of FSA 39 CP04/3, the aim of which is to minimize any possible collusive outcome.
The FSA adds while tacit collusion is unlikely, it can still be considered a high impact risk.
The watchdog says: “Post-implementation work will include monitoring the retail market for evidence of tacit collusion to alert us to any such instances.”
Several respondents point out it is difficult to calculate the extent of any real cost benefits. The FSA acknowledges this, adding it was stated in the CP04/03 CBA that analysis of the economic benefits was based on expectations of consumer and industry behaviour on introduction of the menu into the advice process.
Concern was also raised about consumers shopping around, comparing menus who might be confused by varying representations of the same market average.
Several respondents to CP04/03 were worried about the comparability of commission equivalent with actual commission, which might potentially affect benefits.
The FSA says rules and guidance conducted on in CP04/03 have been amended to ensure comparability as far as possible.
Research by the body also reveals variances in the levels of commission and commission equivalence currently being disclosed for some product groups, which may also reflect actual differences in the calculation methods used. |
However, it may represent differences in the cost of advice between these two channels, says the FSA who will further research this area.
The FSA concludes no changes are required to the compatibility statement set out in Annex 1 to CP04/03.
Despite improved risk appetite
FOS award limit increase
Relates to 136 million transaction reports
Ceremony will take place 13 November