The smallest advice firms face the largest proportion of regulatory costs, with some paying up to 20% of their income, research commissioned by the Association of Professional Financial Advisers (APFA) has found.
The work, which was carried out on 74 adviser firms in Q2 this year, showed firms with an annual income below £100,000 face the largest proportion of regulatory cost, around 12% more than their larger counterparts.
This is despite the Financial Conduct Authority (FCA) regarding these smallest firms as falling "below the threshold" and levying them the minimum fee of £1,000.
APFA found firms with an annual income between £100,000 and £250,000 pay around 19% of their income in regulation-related costs, while those with annual income between £500,000 and £1m pay 8%.
Director general Chris Hannant (pictured) pointed out a large proportion of the costs (16%) for the smallest firms are the 'indirect' costs firms have to fork out in trying to comply with regulation.
"Smaller firms in particular tell us much of these costs come from hiring external compliance support, or using internal resources on regulatory matters," he said.
The total annual cost of regulation for the financial advice industry comes to around £460m, equating to roughly £170 per client per year, APFA said, as it renewed calls for the FCA to reduce the "bloated" cost of regulation.
Hannant said: "There are a number of steps the FCA needs to seriously consider. It should find a way of streamlining the data it asks advisers to provide, and give them more time to provide it. It needs to simplify and consolidate the sheer amount of information advisers have to get through in order to be compliant, via the handbook, seminars and elsewhere. We also need to see clear action on introducing a long stop, to help reduce the cost of PI insurance.
"APFA has written to the FCA with a summary of our findings and a list of areas it needs to address. Good compliance is essential for the industry and for consumers, but the overwhelming feeling at present is that the regulatory burden on advisers is bloated, unnecessarily onerous and potentially damaging to the future health of firms."
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