The highest single cost of complying with Financial Services Authority rules is the cost of regulatory fees, suggests research.
As part of its Better Regulation Action Plan (Brap) progress report, the FSA has published a Cost of Regulation study by Deloitte examining the incremental costs of complying with individual FSA rules for firms in the investment and pension advice sector, corporate finance and institutional fund management.
Brap was announced in December 2005 to assess whether financial services regulation is proportionate, taking into account the costs and benefits of regulatory action.
The report states: “Across all three of the sectors in the Cost of Regulation study the highest single cost identified was regulatory fees. These are the total fees payable to the FSA, the Financial Ombudsman Service (Fos) and the Financial Services Compensation Scheme (Fscs).”
For each sector the FSA receives the largest proportion of the fees paid, from 68% in the investment and pension advice sector to 94% for the institutional fund managers.
The Fscs’s fees make up between 5% and 28% of the total and Fos fees comprise between 1% and 5%.
The FSA states: “We remain committed to increasing the efficiency and productivity of the FSA to limit the impact of our fees on stakeholders. Our budget for 2006/07 increased 5.3% from last year’s budget, but for the third consecutive year we have been able to freeze the minimum fee paid by most small firms and keep any increases below inflation.”
It expects 61% of authorised firms to be liable for only minimum fees in 2006/07.
According to the study the second highest cost across all three sectors relates to keeping up to date with FSA publications and communications.
But the regulator says it has improved its website for small firms to help them access the most important information they need and it has reduced the amount of correspondence to small firms from around two items per day to one a month.
It adds: “As part of out work on making us easier to do business with, we will continue to look for ways to be clearer, simpler and more focused in how we communicate.”
Meanwhile, the highest cost in the investment and pension advice sector only is the production of suitability letters, followed by the provision of key features documents and ensuring products sold are suitable for clients’ needs.
A separate study for the FSA by Real Assurance Risk Management – Estimation of FSA Administrative Burdens – suggests the costs incurred by financial sector firms and individuals in reporting to the FSA are about £600m, or about 0.5% of the industry’s total costs of around £120bn.
The most significant costs arise in relation to anti-money laundering rules – accounting for 42% of the total estimated cost – followed by training and competence record requirements.
The study says the highest burdens in money laundering rules generally arise in two cases: high costs incurred by a few very large firms; or cases where rules apply to a large proportion of the 25,000 firms the FSA supervises, for example the Retail Mediation Activity Report (RMAR).
The FSA states: “We will be deleting the specific record-keeping and reporting requirements from our Handbook but recognise that firms will still be required to comply with equivalent non-FSA statutory requirements and that in managing their risks effectively they will continue to use techniques that were previously an explicit Handbook requirement.”
It adds that as part of Brap it will delete or amend rules over which it has a discretion and where the costs are not justified by the benefits.
A further Benefits of Regulation report by Oxera Consulting sets out a framework for identifying and measuring the benefits of regulation, which the FSA says will enable better analysis to be made of the benefits of rules and support the comparison of benefits with the incremental cost they impose.
In particular, the FSA is planning a review in 2007/08 of its overall client assets regime and it says it will examine any opportunities for reducing the burden of the audit provisions in its Handbook.
Roy Leighton, chairman of the Financial Services Practitioner Panel, states: "The key issue is what the FSA does with these results. The Panel expects the FSA to take quick and decisive action by removing rules from the FSA Handbook where their costs are not proportional to the benefits that they were intended to secure, and I urge the FSA to produce a clear and detailed action plan to do just that."
But John Howard, chairman of the Financial Services Consumer Panel, says the FSA and the financial services industry needs to acknowledge the benefits of regulation for consumers.
He states: "It is not surprising that the report shows that there were higher incremental costs of regulation in the retail sector covering investment and pension advice. This is where improvements in regulation and compliance are being made and continue to be made. There is a history or misselling to retail consumers which needs to be rooted out, and the regulator is starting to increase confidence in the sector."
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7968 4554 or email [email protected].IFAonline
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