UK's Financial Services Authority Reports Progress On "Better Regulation" And Publishes Studies Into Costs And Benefits Of Financial Regulation

The Financial Services Authority today publishes its Better Regulation Action Plan (BRAP) Progress Report, taking forward plans for reform of its rules first announced in December 2005.

This report is accompanied by three pieces of independent research into: the incremental costs of complying with individual FSA rules in three sectors; an estimation of the administrative costs to firms of providing information to the FSA; and a framework for identifying and measuring the benefits of financial regulation.

John Tiner, the FSA's chief executive, said:

"We are determined to strike the right balance between discharging our statutory duties and avoiding unjustified costs. We can do this only with a sound understanding of both the benefits and the costs of regulatory action. The three studies published today underpin that understanding and the update on the Better Regulation Action Plan shows the progress made in the last six months.

"The more significant costs appear to arise from providing point of sale documents to retail customers, monitoring employees' compliance, handling complaints and reporting to the FSA. We have an important programme of work ahead to assess, with an open mind, whether these incremental costs are justified by the benefits and, if not, what changes we need to make."

The BRAP reports on the progress made since last December and relates that work to the two studies on costs of regulation also published today. In particular, it shows that rules which account for over three quarters of the administrative costs are already subject to review by the FSA. The FSA now intends to use the detailed rule by rule analysis of incremental costs set out in the Cost of Regulation study, as described below, to shape future regulatory reform.

The Cost of Regulation study, conducted for the FSA and the Practitioner Panel by Deloitte, examines the incremental costs of complying with individual FSA rules to firms in three sectors – corporate finance, institutional fund management and investment and pension advice. Incremental costs are costs which firms would not incur other than to comply with FSA rules. The results are indicative rather than statistically representative. While much of what regulation requires is, in fact, regarded by firms as good business practice, the estimated incremental costs differ markedly both between sectors and among firms within a sector. The results are specific to each sector, and no general conclusion about the total cost of regulation can be drawn from them.

The Estimation of FSA Administrative Burdens, conducted for the FSA by Real Assurance Risk Management, examines the costs financial sector firms and individuals incur in reporting to the FSA. Its results, which are also indicative rather than statistically representative, suggest that these costs are about £600 million, or about 0.5% of the industry's total costs of around £120 billion. The most significant costs arose in relation to anti-money laundering rules, where the FSA has recently streamlined its own requirements, and regular reporting rules.

The Benefits of Regulation – what to measure and how, study, conducted for the FSA by Oxera Consulting, sets out a framework for identifying and measuring the benefits of regulation. It establishes a best practice methodology for this, building on FSA's existing cost benefit analysis tools. This will enable a better analysis to be made of the benefits of individual rules or clusters of rules and support the comparison of such benefits with the incremental cost they impose.

Background

1. The four reports are all published today on the FSA's website. They are:

   • The cost of regulation study
   • A framework for assessing the benfits of financial regulation
   • Estimation of FSA Administrative Burdens
   • Better Regulation Action Plan Progress Report

2. A briefing note setting out in more detail the proposals in the Better Regulation Action Plan and the key findings from each of the three research reports is also published on the FSA web site.

3. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection for consumers; and fighting financial crime.

4. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.