The National Audit Office (NAO) has called on the financial regulators to show they are providing value for money after finding they do not have processes in place to judge the best use of their cash.
The new twin peaks regulators - the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA,) - will cost the industry about £664m this year, 24% more than the regulator they replaced last April, the Financial Services Authority (FSA).
But neither regulator has yet put in place a proper way of evaluating the benefits and costs of how they spend their budgets, the NAO found in its review of the new regulatory structure.
For example, the FCA estimates the level of consumer harm in the individual reviews it carries out, but it has not yet established an overall way of estimating consumer harm, and therefore how best to direct its regulatory activity, the NAO said.
The audit office also found a high staff turnover at both organisations that, it suggested, may undermine any attempt to create "more effective" regulation.
But it acknowledged there were "encouraging signs" coming from both regulators, that suggested regulation has become more judgement-based and forward-looking, encouraging earlier and more decisive regulatory intervention.
NAO head Amyas Morse said: "These are still early days for the new regulators, and there are encouraging signs that their new approaches are gaining traction.
"Attracting and retaining the right staff are vital to keeping this progress on track, and so both regulators need to tackle this issue.
"In future, we will expect the FCA and PRA to demonstrate that their increased costs are achieving value for consumers and the taxpayer."
Of those who resigned from their post at the FCA last year 31% were classed as ‘high-performers' and now more than a third of FCA staff have less than two years' service including their time spent with the FSA, the NAO found.
The negative effect is made worse as the range and depth of skills required by the new regulators has increased with their expanded remits, the NAO said.
FCA board minutes published in January showed the regulator was concerned about its staff's rush to exit.
The FCA and PRA had initially attributed the extra £127m regulatory cost for the last year to additional front-line staff, additional costs to replace information technology and new IT, support and premises costs, in order to create more effective regulation.
But the NAO warned the high staff turnover at the organisations may mean knowledge within the organisations will be lost and industry confidence in the regulators could in turn be undermined.
The FCA recognised providing value for money is important. An FCA spokesperson said: "The fees charged enables us to regulate effectively and cover our wide-ranging remit. For the last financial year 42% of authorised firms paid the minimum fee which was unchanged for a fourth year."
The regulator also pointed at the merits of hiring new staff. It said it found it important to strike a balance between "experience and those who can bring a fresh perspective".
The NAO found there was a "good working-level relationship and communication" between staff at the FCA and PRA, although it said coordinating work between them will need to be improved to help manage potential conflicts between prudential and conduct objectives.
Find the NAO's report Financial Conduct Authority and Prudential Regulation Authority: Regulating financial services HERE.
Key facts (source: NAO)
Estimated value of the UK financial services industry: £234.2bn
Full time employees working for the PRA and FCA: 3,815
Forecast combined cost of the two regulators in 2013-14: £664m
Increase in the cost of regulation (FSA, FCA & PRA): £127m
Number of FCA conduct regulated firms: 26,000
Number of FCA prudentially regulated firms: 23,000
Number of PRA prudentially regulated firms: 1,700
Value of regulatory fines levied in 2013: £472m
2013 annualised staff turnover at the FCA: 9.7%
2013 annualised staff turnover at the PRA: 11.7%
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