Small- and medium-sized enterprises, as defined by the European Commission, are businesses or companies that have fewer than 250 employees; and have either annual turnover not exceeding around €50m (£44m $54m) or an annual balance-sheet total not exceeding €43m.
In the UK, they are the backbone of the economy. But unfortunately, these companies are also going to feature strongly among the economic casualties of the coronavirus pandemic.
If many SMEs in the financial advice sector are forced to shut down, it will leave clients stranded without an adviser.
The UK government and the Financial Conduct Authority (FCA) have both tried to help these businesses survive.
The schemes that have been implemented include:
- £330bn ($410bn, €379bn) of government support through loans and guarantees;
- Deferral of VAT payments;
- Furloughing – an 80% contribution towards employees pay;
- Business rate relief and business support grants;
- Flexibility around the Mifid II 10% drop financial reporting to clients; and
- Temporary loosening of the senior managers and certification regime.
Enough done
International Adviser has spoken to a number of financial advice firms about whether the government and the FCA have done enough to help the sector out financially.
Ian Barnett, director at advice firm Lewis Brownlee, said that whether the government has done “enough” depends on how individual businesses operate, how their income is derived and how much capital they have.
The founder of Equilibrium Financial Planning, Colin Lawson, added that the government has “done everything they can to support businesses across the board”.
“They have acted very quickly and, whilst there may have been some issues with the delivery, I think that this is understandable given the timescales and the sheer size of the response.”
When discussing the regulator’s actions, Tim Sargisson, director of Sandringham Financial Partners, said that the FCA has three operational objectives of protecting consumers, ensuring market integrity, and promoting effective competition.
He added: “In other words, it is not the regulator’s role to help firms. This explains why calls to temporarily reduce the capital adequacy buffer has only provoked a response that the FCA will ‘provide flexibility to regulated firms’.”
More to come?
No one knows how long this pandemic will keep the UK in lockdown or social distancing will be enforced, so do the government and the FCA need to do more?
Craig Stokes, head of advice at Pension Advice Specialists, said that the business interruption loan scheme is “proving to be a real lottery to those applying for the support”.
“This has to be in place for those firms that need it most and it is clear that these firms are being denied this support for a number of reasons, some of which fall on the provider acceptance policies, which do not seem to have been relaxed.
“The government needs to provide further guidance to loan providers.”
On 27 April, chancellor Rishi Sunak said that small firms will get access to 100% taxpayer-backed loans after they raised concerns about slow access to existing coronavirus rescue schemes.
The loans will be up to £50,000 and paid within days of applying.
Lawson added: “There will need to be more [help] for sure if we are to avoid a depression. It’s too early to say at this stage what will need to happen.
“I do think [the FCA] should escalate their response to phoenixing though, as many firms will go bust as a result of this crisis.”
Difficulty
Not many advice firms are utilising the current government schemes as much as they could.
Recently, IA reported on a Panacea Adviser network survey of 166 people which found 44% of advice firms do expect to furlough staff over the next three months, while just 18% of advisers have asked for access to government funding.
So, how difficult will it be for advice businesses to survive this crisis?
“Most advice firms have enjoyed strong revenue growth over recent years and, if they aren’t able to [survive, it] would probably mean there are underlying issues with their businesses anyway,” Sandringham’s Sargisson said.
Equilibrium’s Lawson said: “I am certain that many firms that rely on initial income will struggle. Firms that are not able to communicate well with their clients will quickly lose market share.
“Those firms that do not look after their staff well may lose key employees.”
Regulatory costs
The Panacea Adviser survey also found 76% of advisers believe that there should be a regulatory fee holiday for advisory firms until 2021.
Some 75% are worried about unexpected Financial Services Compensation Scheme (FSCS) levy cash calls coming over the rest of the year, while 77% believe professional indemnity (PI) insurance cover should automatically renewed for another year in the current climate for those with claim free status.
In April 2020, the FCA said that levies for financial advisers will increase to £80.7m in the 2020/21 financial year, a 1.6% rise from £79.4m paid in 2019/20.
The UK regulator said it would aim to protect the “smallest firms by freezing minimum fees”, which means that the 71% of firms that only pay the minimum will see no change in the sum that they pay.
Strained sector
PI cover and levies were a problem for advisers before this pandemic, and Lewis Brownlee’s Barnett said that “upcoming FCA fees and PI cover will also have a huge impact on the ability of firms to survive”.
“The regulator must be able to help here, over the last few years PI cover has become more and more expensive, and with the overhang of previous defined benefit issues, this is only likely to increase,” he added.
Sargisson said that FSCS levies will not help with the pandemic, as advisers are expected to pay £213m towards the levy for the coming year, almost 13% more than the previous year.
“The brutal fact is that poor advice by ignorant, incompetent and greedy advisers has placed an intolerable financial strain on the advice community over several years; and coronavirus means that, for many firms, that position will worsen,” he added.
“We would be so much better placed to weather this storm with the money in our bank account rather than disappearing to fund the FSCS.
“This crisis might hasten the demise of said advisers and ensure they never get near ‘Joe Public’ and their hard-earned savings.”
Priority
Firms have to be smart with their operations and keep core functions running.
Sargisson added that firms should trim budgets that are no longer appropriate.
“There is no point spending money attracting customers to parts of your business that can no longer operate as normal.”
Pension Advice Specialist’s Stokes said: “For us, the priority should be trying to continue running the business ‘as normal’.
“We work in an industry where this is possible and we work in a time when technology can help support this. There is no lack of demand for advice in these times, so we just need to find a way of providing this.
“Unlike many industries, we are extremely lucky to have the ability to potentially get through this unscathed or even stronger.”
Financially sound
No one could have predicted that this pandemic would have had such a massive impact on people’s daily lives, but how can firms make sure they are not caught out by something like this ever again?
Lewis Brownlee’s Barnett said that the desire to see revenues maintained at “de minimis level” will become more important and will likely feature in business continuity plans.
“There has always been a need to hold cash for capital adequacy requirements, firms may want to hold more as a contingency against this situation happening in the future.
“But they would not want to be penalised for doing so, regulation may intervene here and require firms to retain more capital in any event.”
Barnett also mentioned about how the charging model may change in the future.
“It is possible a blend of ongoing fees may be used, some linked to assets and some more fixed in nature.”
Resilience
Pension Advice Specialists’ Stokes said that it is vital that financial advice firms have the capital required to “ride out unexpected periods of decline and low demand”.
“This has also shown us that a level of regular ongoing fees for managing funds under management can be vital, when something happens that strongly limits or reduces fees taken for initial advice.
“Those firms with a high level of assets under management are undeniably in a stronger financial position than those that rely on transactional business.”
Sargisson added: “Resilience will become the new buzzword. Stronger balance sheets to weather future storms, understanding clients who are profitable and who aren’t, and also understanding where the best margins are to be had.”
