How to prevent the FCA from interfering with your charging model

by Damian Davies on 30·06·2020

My grandmother always said age does not come alone. 

One of the facets of this I find fascinating is the way the relative passage of time changes as you get older.

It is sort of like living in a Christopher Nolan movie.

When I was a kid, summer holidays lasted FOR EVER.  Now, as a greying old man, a year passes in the blink of an eye. 

This shift, however, does help you to look at changing regulation with a different perspective.

When I look at some of the rules in MiFID II and PROD (2018), it feels like some of them happened because RDR (2012) didn’t have the outcome the regulator hoped for.

For example, we got nudged about delivering annualised service if we charge annualised fees with RDR.  We didn’t really do it the way we were expected to, so rules regarding annualised suitability reports came in to make it happen the way the regulator expected.

As such the recently announced ban on contingent charging on DB transfers feels like a pivotal moment in the regulator’s relationship with adviser charging.

Let me show you what I mean.

In October 2013, Rory Percival said, “We are not a price regulator, it is not for us to tell firms how much they can charge or whether they are giving value for money.

“The only person who can decide value is the client. There are rules around disclosure and they are in place so they can see exactly what services they are paying for.”

Roll forward 4 years to February 2017, and Mary Starks, Director of Competition and Economics for the FCA, delivered a speech which explained that they MIGHT be a price regulator:

“I often get asked whether the FCA is a ‘price regulator’. It’s a deceptively straightforward question.  I’d love to give a simple yes or no answer and finish the speech here, but the answer is it depends (I am an economist after all).”

Now, three years later, we have the ban on contingent charging for DB transfers.

The implications seem pretty clear to me.  The regulator probably feels the guidance they give on charging, (the fee is irrelevant as long as it is commensurate with the value of service delivered) has not materialised, so they need to move from guidance to rule.

If they are doing it on DB transfers, it isn’t a massive leap to imagine it happening universally.

I wonder, therefore, whether now is a good time to look at your charging more widely and start to consider how to prove the value in your charges,

This doesn’t necessarily mean changing the way you charge, but rather looking at what you charge with a critical eye and try to determine if the value in the charges are clear for clients to understand and clear for the regulator to appreciate.

If risk-based charging works, and the regulator can appreciate the value, they will not need to change it. 

If it doesn’t, there is no harm in changing it.

Analysis like this can seem pretty onerous, but it is like eating an elephant – just do it one bite at a time.

So, the first bite is pretty easy – time record EVERYTHING!

With the technology available these days, it is really easy to set up time recording and also to keep recording every day.

Everything you do in a business revolves around delivering the service for less than the fees you charge.

The difference is your profit. 

If you do not time record, whilst you will know how profitable the business is overall, you will have no idea what the costs are for each part of the delivery and importantly each person in the process or which clients make you money and which cost you money.

If you are charging risk-based fees, you have a variable income for a fixed fee.  Just because two seemingly identical clients have 2 seemingly identical scenarios doesn’t mean they will have the same cost of delivery. 

Once you start to build up a critical mass of information, it becomes really addictive to start analysing it for patterns and trends. 

·         Why do these cases take so much longer than those?

·         Why am I working so late on those days every month?

·         Why does every client with that accountant generate so much more profit than the others?

This is where the business value comes in, and in turn this is where you start to be able to prove your value to your clients (and the regulator).

When we started the process, it took us around 2 weeks to iron out some anomalies and define a system that works for us, so bear that in mind.

I will explore ways to demonstrate value in the next article.