The Financial Services Authority (FSA) has today announced its proposed Annual Funding Requirement (AFR) for 2012/13.
This is likely to be the FSA's final AFR before it splits into the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), in 2013.
The FSA recognises the difficult economic circumstances for many firms and is committed to keeping any essential cost increases to a minimum. The FSA will achieve this by capping staff levels for the second year in a row and restricting core operating costs too, broadly in line with inflation.
The FSA's core programme for the year includes:
Maintaining ongoing supervision of firms in a period of continued fragility in markets including business model analysis, capital/liquidity assessments, recovery and resolution planning and the Significant Influence Function regime;
Continuing to influence the international and European policy forums;
Implementing the current EU major policy initiatives, including Solvency II;
Delivering on the principal FSA initiatives to improve consumer protection: the Retail Distribution Review (RDR) and Mortgage Market Review (MMR);
Continuing to focus on the quality of its staff;
Continuing to deliver a tough and determined enforcement approach.
In addition to the funding of its core programme a significant part of the increase in this year's AFR reflects the costs of implementing the government's reform of the UK regulatory framework. The current £32.5m costs for the restructuring are within the overall estimates set by HM Treasury last year, which equates to 28% of the increase in AFR. The AFR will also cover the costs of modernising the IT infrastructure to ensure it is a suitable platform before the transition to the FCA. This will require a £22.4m increase in the AFR, which equates to 29% of the increase in AFR.
Overall the AFR for 2012/13 is £578.4m, up from £500.5m in 2011/12, a gross increase of 15.6% in overall funding. The increase in fees will be borne mainly by larger firms, reflecting the resources applied to intensive supervision of high imp of high impact firms. Medium sized firms will see a proportionate increase reflecting the type of business they conduct. Currently 42% of the FSA's authorised firms need only pay the FSA minimum fee and for the third year running the gross minimum fee for firms will remain unchanged at £1,000.
Ahead of the split in to the PRA and FCA the FSA will reorganise internally and move to a twin peaks model that will begin to reflect the shape of the new authorities. This is the first step in moving from an integrated model of regulation to one that divides prudential and conduct regulation, put forward by the Government. This will require a major change programme and a refocusing of resources.
The enforcement fines the FSA imposes during the previous year are returned to the industry by way of discounts to their fees in the following year. This year anticipated financial penalties are estimated to be £58.7m.
Hector Sants, FSA chief executive, said:
"The year to April 2013 is expected to be a challenging one for the FSA. We will be moving to a twin peaks model internally ahead of the split into the PRA and FCA, whilst at the same time continuing to focus on our supervisory role in a very difficult economic environment. We are mindful of any increase in costs to industry and have continued to maintain headcount and keep core operating costs in line with inflation. Nevertheless the AFR is still rising as we implement the government's regulatory reform programme and invest in the necessary long term IT infrastructure. The increases will be borne mainly by larger and more complex groups. We have, however, minimised the impact on smaller firms by keeping the minimum fee at £1,000 for the third year running.
"Much of the increase in AFR is the result of the additional resources needed to implement the new regulatory structure but these costs for the restructuring are in line with government forecasts. The FSA will continue to deliver intensive and intrusive supervision and develop the key policy initiatives but we are not planning any new discretionary initiatives. The principal initiatives are progressing the domestic consumer protection strategy, implementing a number of key EU directives and influencing the continuing international regulatory reform agenda."
The FSA levies fees on behalf of the Financial Ombudsman Service (FOS), the Financial Services Compensation Scheme (FSCS) and the Money Advice Service (MAS). The total MAS budget for 2012/13 is £86.8m, up from £43.7m in 2011/12. This reflects the decision by the government to move debt advice to the MAS. Debt advice was previously government-funded. The FSA is consulting on the allocation of the debt advice costs to the relevant fee blocks.