YOUR COMPLIANCE MATTERS:          Increasing cost of regulation

Relevance:                   All firms.

Action required:           Ensure increased costs are budgeted for.

The cost of Authorisation and Regulation by the FCA will always be a source of concern and irritation to financial services businesses. Costs can go down as well as up, although we only ever remember the increases.

So, now that the FSCS (Financial Services Compensation Scheme) has published it’s 2020/21 Plan and Budget, following that of the FOS (Financial Ombudsman Service) in December 2019, it is worth reminding firms of some aspects of the “funding of regulation”.

To finance the work undertaken by the FCA, they charge fees to:

·          the firms they authorise; and

·          some other bodies such as recognised investment exchanges or registered firms.

There are 3 types of fee charged by the FCA:

·          Application:                     when a firm seeks authorisation;

·          Variation of Permission:   when a firm wants to change its authorised permissions; and

·          Annual (Periodic):             which is payable each year

They also collect fees and levies to pay for the costs of the:

·          Financial Ombudsman Service (FOS);

·          Financial Services Compensation Scheme (FSCS);

·          Financial Reporting Council (FRC);

·          Illegal Money Lending Team (IMLT);

·          Money and Pensions Service (MaPS);

·          Payment Systems Regulator (PSR); and

·          Prudential Regulation Authority (PRA).

Which organisations a firm pays towards will depend on the type of business they run.

Each year, starting in October, the FCA begins to develop the fee rates and fees policy for the coming financial year (April to March). At the end of this process, from July to September, firms will be invoiced for payment of their annual fees and levies, based on the fee and levy rates and policies developed. This process is referred to as the ‘annual fee cycle’.

FSCS levy:

As indicated above, the FSCS has recently published the document that describes its past uses and future needs of its funding. The FSCS deals with claims against authorised firms that have failed (for example because of insolvency). It has the power to pay compensation to consumers. All authorised firms pay the FSCS levy.

For 2020/21, the indicative overall levy is £635 million, an increase of £87 million from the levies raised in 2019/20. We are informed that the increase is due to a rise in SIPP operator claims, previous surplus not now available and anticipation of a reduced level of recoveries.

The General Insurance Distribution Class will be expected to pay £23 million towards this indicative levy, up £11 million on the final levy for 2019/20. The FSCS will confirm its final levy in April 2020.

We have suggested that firms should, where available, take advantage of the effect of “tailored income” (for the FOS and FSCS items), as an exercise in controlling the amount to be charged. In the past, firms have taken the view that the amount of effort put into such an exercise may not be cost effective, especially for the FOS levy. That may be so, but with increasing costs all round, it might be worth a revisit.

If any individual firm would like specific assistance with “tailored income”, please contact us.