The main theme is a continuation of the programme and priorities set out last year, supplemented by new responsibilities for mortgages and general insurance, following the government's decision in 2001 to widen the FSA's scope. These new regimes have significantly altered the balance of the FSA's work: 97% of the 25,000 regulated firms are now 'small firms' and particular attention and investment will be focused on this sector.
Callum McCarthy, FSA Chairman, said:
"With our new responsibilities for mortgage and general insurance brokers comes the responsibility for a further 14,000 firms, almost all of which are small firms. We recognise that small firms are particularly aware of the costs of regulation – not only the direct costs of the FSA, but also the general costs of compliance with law and regulation in the widest sense.
"We will be examining, more thoroughly than ever before, the effectiveness of our supervisory work, how easy it is for small firms to do business with us, the benefits and costs of our regulations and rules, and whether there are some of these we can eliminate."
The plan outlines what the FSA will do to achieve its three overarching aims:
Promoting efficient, orderly and fair markets: A major challenge for firms and the FSA, in its day-to-day supervision, is to maintain the standards which make the U.K. such an attractive place for international business, at a time of an unprecedented volume of regulatory change. This includes: implementing the Capital Requirements Directive, which originated in the Basel Committee; various Directives deriving from the EU Financial Services Action Plan, including the Markets in Financial Instruments Directive; and changes to international accounting standards.
In keeping with the plan's theme of continuity, established projects will be driven forward, including a review of the effectiveness of the industry's response to initiatives on investment research and softing and bundling. The FSA will also review practices in the primary debt markets, complete current work on hedge funds and, in the wholesale insurance market, will concentrate on the issue of conflicts of interest and transparency, including adherence to its rules on transparency of fees and other payments.
Helping retail customers achieve a fair deal: The market for retail financial products and services can be made to operate more effectively by developing: capable and confident consumers; better information for consumers; and better and more responsible behaviour on the part of regulated firms. The FSA will continue to provide leadership in developing the National Strategy for Financial Capability. Some of the strands to be delivered in 2005 – such as those related to schools – will be launched nationally in the second half of the year. Others require pilot projects before being launched on a national scale and, where potential long-term funding has been identified, the FSA will fund these pilots.
Work will continue with firms on Treating Customers Fairly (including providing firms with specific guidance on what is expected of them) and improving the quality, clarity and relevance of information provided to consumers (including through KeyFacts documents). 2005 will also see full implementation of the depolarised advice system, including the 'menu' designed to explain to consumers the cost of advice, and the basic advice regime for stakeholder products.
Improving business capability and effectiveness: Acting effectively remains one of the FSA's three primary aims and covers: devising policies which are proportionate; using resources efficiently; and making the FSA an easier organisation with which to do business. Building on the progress already made in improving processing of high volume transactions (e.g. rule waivers and requests for guidance) the FSA will make increasing use of technology in its dealings with firms.
Other new and recently introduced initiatives for small firms include the ability to build personal handbooks, capped fee increases for 2005/6 for the vast majority of small firms and considering a market solution to enable small firms to pay fees and levies by instalments.
In terms of the costs and benefits of regulation, the FSA will take forward a detailed study of the costs of regulation, in partnership with the Practitioner Panel. This will have a particular focus on the costs imposed on small firms. Market failure and cost-benefit analysis will continue to drive policy thinking and particular consideration will be given to the likely effects of those policies on small firms. The FSA will also continue to develop its risk-based approach to regulation so that it responds to changing risk in a proportionate, economic and effective manner.
Enforcement priorities arise directly from supervisory work. Therefore the main wholesale enforcement priorities for next year are likely to be: senior management responsibility; market abuse and insider dealing; breaches of the Listing Rules and Principles; sponsors; conflicts of interest and front-running. The main retail enforcement priorities for next year are expected to be: senior management responsibility; mis-selling; complaints-handling; financial promotions; inadequate financial resources; and unauthorised activity by firms in the mortgage and general insurance markets.
The FSA intends to review its procedures for investigations and making enforcement decisions. In particular, careful consideration will be given to the comments of the Financial Services & Markets Tribunal in its recent judgment on the case between the FSA and Legal & General.
Callum McCarthy said:
"Our focus in 2005 will continue to be on delivery: transposing European Directives in a way that is sympathetic to the UK marketplace; implementing policies on which we have already consulted; consolidating our risk-based approach; and improving our business capability and effectiveness.
"A key challenge for us will be to demonstrate that the costs of regulation are justified by the benefits. We have listened to the industry's concerns about the impact of regulation on their business and this year we will conduct a detailed study on the matter, with a particular focus on small firms. We will also be looking to cut back our requirement where we can do so without damaging our ability to meet our regulatory objectives. This reflects a new determination to be more rigorous about the burdens and costs imposed."
The budget
The budget proposes a total expenditure in 2005/06 of £266.6 million. This is 6.5% higher than the £250.3 million that the FSA is forecast to spend in 2004/05. However, the net amount that the majority of firms will be expected to pay the FSA in fees in 2005/06 is likely to rise by around the rate of inflation.
The increase will be allocated to the FSA's major priorities:
- an additional £5.9 million will fund the shift from set-up to operation of the first full year of the new Mortgage and General Insurance (M&GI) regulatory regime;
- a further £4 million will be allocated to the National Strategy for Financial Capability; and
- more than £1 million will be spent on new initiatives aimed at better understanding and reducing the level of indirect costs imposed by the regulatory regime.
Callum McCarthy added:
"The Board has thought long and hard about whether an above-inflation increase to our costs can be justified. In that context, the vast majority of our priorities, including in particular investment in the quality of our staff, will be funded within an inflation adjusted cost base. This is achieved by a combination of re-prioritisation, improving productivity and reducing our fixed overhead costs.
"The budget which we propose is targeted at the key areas in which it is essential for us to make progress. We believe that what we propose is justified if we are to meet the many demands placed on the FSA."
Fees The FSA has also published today its consultation paper on fees for 2005/6. For the first time, the fees for the FSA itself, and the levies for the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS) are being published in one document. This reflects the move last year to invoicing these costs together rather than in three separate amounts.
Changes to the amount charged vary widely across fee blocks and for different sizes of firms. Some will see no change or a reduction, in real terms. Around 60% of regulated firms (principally small firms, paying minimum fees) will see rises in FSA fees of no more than 2.5%. In some blocks the amount will be reduced as a result of fines, which are expected to total around £21m for 2004/05. This is directly deducted from the fees paid by firms.
However, in some other blocks, increases in the FSCS levy for that particular fee block are expected to result in a rise in combined charges. The block experiencing the highest percentage increase will be "A7" which covers fund managers, where the FSCS is making provision for compensation claims associated with split-capital investment trusts.
The total FSCS levy for all fee blocks is currently estimated at £202.9m, a 7% reduction on the £218.2m requested last year. The FSCS expects to see a 53% increase in new claims, from 13,400 to 20,500, during the year and to pay out £255.1m in compensation. The FOS levy is similar to last year at around £11m, a fall of 13.6% from last year. The remainder of the FOS expenditure of £33.8m is raised by separate case fees and has risen by 18.6%, as the number of claims has risen.
FSCS expects to announce its proposed 2005/06 levy at the end of March and the FSA fees and FOS levy will be agreed at the end of May 2005.
