Regulation is designed to maintain the integrity of the financial system and protect consumers, but what is the cost of financial services regulation?
Today sees the publication of the Financial Conduct Authority’s (FCA’s) annual budget for 2014/15.
In the year ahead, the UK financial services regulator will spend £446.4m on regulating the conduct of retail and wholesale financial services firms.
This represents a 3% increase on their 2013/14 budget of £432.1m and includes a £10m underspend from last year.
Of this £446.4m budget, the UK financial services sector will pay £402.8m, with the balance funded from retained FCA fines. When the FCA fines companies, they pay these fines across to the Treasury but hold on to the cost of enforcement.
£446.4m is not the only cost of financial services regulation. It is a direct cost of regulation, with investment advisers (such as Informed Choice), mortgage brokers and general insurance brokers paying 31% of this regulatory cost burden.
What comes with regulation is several other layers of indirect regulatory costs.
As a regulated firm, we have to fund our share of the cost of the Financial Ombudsman Service (FOS) and Financial Services Compensation Scheme (FSCS).
We also have to fund our share of the (not fit for purpose) Money Advice Service.
In addition, we are required to hold Professional Indemnity insurance and retain a certain level of capital adequacy, which comes at a cost as it means holding non-working capital in the business.
Finally, we have to devote a large number of hours each month to the compliance with regulation and reporting to the regulator, as well as record keeping and checking.
All of this means that the cost of financial services regulation is easily double the direct cost of the FCA budget, and much more than double in some years when calls on the FSCS are larger or the Professional Indemnity insurance market is harder.
This cost of financial services regulation is inevitably a burden which falls not only on regulated firms but also on their customers.
We are in favour of robust financial services regulation, at a sensible cost.
The 3% increase to the FCA budget for 2014/15 is not unreasonable given the additional scope of their work regulating consumer credit markets and some of the scandals they are currently working hard to prevent.
What must be considered though is the cost of both direct and indirect financial services regulation.
Since the FCA took over responsibilities from the FSA this time last year, the early indications are they are addressing the total cost of financial services regulation and working to reduce these costs for consumers.
