Posted: 24th June 2013

Whilst the Financial Conduct Authority’s consultation paper – “Regulated fees and levies:  rates proposals 2013/14 (CP31/1)” – issued in April 2013 might not be top of everyone’s reading list, it does contain key points of interest.

The cost of regulation was always going to increase with the move from one regulator to twin peaks. Overall, the annual budget for the new system of regulation rises 15% from the Financial Services Authority’s. The FCA’s budget 2013-14 is £432.1m and the combined FCA and Prudential Regulation Authority (PRA) annual budget is £646.3m. To compare, the FSA’s annual budget was £559.8m for 2012-13.

In addition to the proposed annual funding requirement (AFR) increase, the FCA will carry out a review into how it calculates firms’ regulatory fees. This may see the current fee block model being scrapped with fees allocated on an income or risk basis in the future. Therefore, C1 firms may take more of the fee burden.

Where will these increased fees be spent? A significant part (£34m) of the increase in costs is attributed to an increase in front line staff costs. This was to be expected given the increase in staff quality demanded by regulated firms and quantity demanded by more intrusive regulation.

The FCA business plan points to the rest. It lists the FCA’s strategic priorities for mitigating the risks, as does the Risk Outlook’s statutory objectives. Looking at these, the increase largely reflects the need to embed the judgment based, forward looking and risk focused supervision approach for both the PRA and the FCA.

There is another key driver for the cost increases. Namely, the Chancellor will receive the proceeds of financial penalties. In 2012-13 this amounted to £380m. Going forward, the FCA will only receive the associated costs of enforcement, the rest being paid straight to the Exchequer.

The closing date for consultation on all the proposed regulatory fees and levies is 9 June 2013. Plenty to ponder.

Huntswood h yellow

Huntswood - Insights