Our response to FCA fees paper, “FCA regulated fees and levies: rates proposals 2013/14, CP 13/1

Background

The Building Societies Association represents mutual lenders and deposit takers in the UK including all 46 UK building societies.  Mutual lenders and deposit takers have total assets of over £375 billion and, together with their subsidiaries, hold residential mortgages of £245 billion, 20% of the total outstanding in the UK.  They hold more than £250 billion of retail deposits, accounting for 22% of all such deposits in the UK.  Mutual deposit takers account for 31% of cash ISA balances.  They employ approximately 50,000 full and part-time staff and operate through approximately 2,000 branches.

Executive summary

We recognise the need for an adequately-resourced conduct regulator staffed by competent, experienced and effective people. But this also entails robust budgetary control, resistance to “mission creep”, and prioritisation of tasks as resources simply cannot cover everything. The ability to levy fees on FCA-regulated firms does not constitute a blank chequebook.  Therefore, our concerns remain essentially the same: the regulator’s costs.  How fees and levies are calculated is almost secondary.  Regrettably, the current plans risk following the path of indiscriminate and unchecked spending set out by the predecessor body, the FSA.   There is no clear correlation between high spending regulators and successful ones.

Q1: Do you have any comments on the proposed FCA 2013/14 minimum fees and variable periodic fee rates for authorised firms?

The £445.7 million ongoing regulatory costs of the Financial Conduct Authority in 2013/14 will be spread over the dual regulated firms, which include all our members, and solo regulated firms.  They are spread over eight fee blocks, seven of which cover dual regulated firms and one the solo regulated firms.  Table 3.2 of the consultation shows that the A.1 fee block – deposit acceptors, a category which includes all our members – will pay £59.9 million (14%) of the FCA’s annual funding requirement (ORA less rebates) of £432.1 million.  Once the PRA fees are added in for the A.1 fee block the costs rise, however, to £206 million, an increase of 20% on 2012/13.

Chapter 3.12 of the consultation puts the FCA’s increased allocation to deposit acceptors down to overseeing the review and redress process for the interest rate swaps mis-selling, technological resilience including implementing the lessons learned from the RBS Group systems failure, complaints handling, authorisations and anti-money laundering.

What part of this relates to mutuals?  Mutuals such as building societies are required to provide a minimum of 75% of their lending in the form of residential mortgages. Building society law forbids them to take risk positions in commodities, currencies or derivatives.  In addition, a minimum of 50% of their deposits must be from retail sources.

By way of example, we refer to one of the FCA’s grounds for the increased allocation to deposit acceptors - complaints handling.  Mutuals’ record here is greatly superior to that of plc-owned banks.  The Financial Ombudsman Service’s annual reviews repeatedly confirm that there are fewer complaints against building societies and those that exist are upheld far less than banks.  For example, FOS’s 2011/12 review shows 3.5% of all complaints were against building societies compared to 65.5% for banks.  Furthermore, the uphold rate for societies was 21% whereas it was 70% for banks.

The above arguments all point to the fact that mutuals subsidise plc-owned banks in funding the regulators.  Mutuals’ activities are limited prudentially yet the costs of the entire FCA (and PRA), which include supervising far more exotic activities than mutuals engage in, are allocated on firms’ size alone.  Lower risk profiles are ignored.  We therefore welcome the FCA’s review of its funding model and suggest it moves quickly to correct this imbalance.

Another issue we suggest the FCA review addresses is the timing and arrangement of its funding and fee (and levy) consultations.  Currently, fee policy proposals are issued independently of draft and final fee (and levy) consultations which themselves are separate from the business plans and risk outlooks which drive the funding requirement.  More helpful, and certainly more transparent, would be to have just two such publications: a draft fees consultation which sets out the desired funding for the FCA set against future activities and a final fees consultation that takes into account comments received on the draft.  With the current arrangement, even with the helpful fees calculator, it is hard to work out what fees and levies will look like in future as many depend on outturns that are only available at certain times.

Cost recovery in the A.1 fee block is weighted towards “higher impact firms”[1].  Impact is judged by the size of the firm only.  This affects our larger members, which, as mutuals, operate different, lower-risk business models to plc-owned banks.  But fee-wise larger mutuals are treated the same as large, international and complex plc-owned banks.  That cannot be fair.

Building societies’ stautory principal purpose remains the making of residential mortgage loans funded by the savings of members, so their business models are simple and lower-risk, involving straightforward savings and mortgage accounts. Few operate current accounts, and building society law forbids them to take risk positions in commodities, currencies or derivatives.

The flaw in the current FCA model is that there is no mechanism or incentive to “reward” lower risk firms.  Low risk deposit acceptors, such as mutuals, particular the smaller ones, are penalised if they grow by higher fees and levies.  We are therefore pleased that the FCA has put in train a review of fees and has involved trade bodies.

The retention of the minimum fee at £1,000 is welcome especially when fees for larger firms are rising.  We note in chapter 4.3 that the FCA aims to “ensure that the minimum fee level is not too high (which would unnecessarily impede competition) and not too low (which would prejudice existing fee-payers)”.  This statement, appears, however, at odds with a later one at chapter 4.5 which says that the minimum fee has not changed for the fourth year running while fees paid by medium and larger firms have risen significantly.   More appropriate would be a positive confirmation that the regulator has decided to keep fees low for smaller firms in order to encourage diversity.

Costs

It is not possible to know the split pre-“legal cutover” between prudential and conduct areas of the FSA’s work.  We are therefore only able to compare the combined figures for 2012/13 and 2013/14.

In 2012/13, the FSA budgeted for £535.5 million yet the equivalent figure one year later for the FCA and PRA is £663.3 million[2].  Some of the 24% increase can be accounted for by the government’s decision to retain financial penalties net of enforcement costs.  Without the loss of the financial penalty discount the increase would have been 15% - still a very large increase.  It could be argued that the PRA and FCA should take steps to reduce overheads or curtail non-essential work in light of this loss; this is what industry has to do.

There are a number of areas where spend appears not to be adequately controlled. The first is staff. 

Staff – Numbers and associated costs continue to rise steeply.  In 2013/14, the two regulators are seeking a £34.4 million, or 15%, increase in front-line staff, which includes supervisory and policy staff.  The FCA’s staffing increase is a 6% higher than the FSA equivalent.   The PRA numbers are a similar 5%. Both increases are necessary to “deliver the new supervision approach”.  But how “new” is this approach?  The FSA had been configured as a prudential and conduct business units, developing and pursuing their separate  approaches for at least a year before “legal cutover”.

One of the reasons given for a higher annual funding requirement in 2012/13 was a core work programme which included more intensive supervisory costs (and a 3.5% salary increase for FSA staff). This led to an increase in the AFR of £29.1 million, or 5.9%.  Compare this with the previous year, 2011/12 when it was announced that there was no plan to increase the overall FSA headcount.  In that consultation[3], the FSA said: “Our intensive approach to supervision will complete its implementation with increased resources, including prudential risk specialists now assigned to our largest firms.”  So what happened to make the FSA, and now the FCA and PRA, reverse that implementation to increase staff again?

The upward trajectory of staff numbers is regrettably a key feature of recent regulatory fee consultations.  In 2007/08, the FSA announced it would spend up to £50 million over three years on a programme of change across the organisation, including upgrading the skills and expertise of its people, staff

reorganisation and improving its knowledge management capability. [Two years later the FSA is still confident[4] that: “This investment will lead to benefits that will be realised over a longer period and will contribute to our move to a more outcomes-based regulatory approach.”]

The following year, 2008/09, the FSA increased its budget to include an additional £13.6 million for a supervisory enhancement programme that entailed the recruitment of 280 extra staff. In 2009/10, reference is made to the continuation of further expenditure through the year “driven by the enhancement of our supervisory processes”. But in 2010/11, the FSA concluded it needed even more staff - another 460[5]. Total headcount appears to have increased from 2,740 (March 2008) to 3,992 (March 2012) - a 46% increase over four years.   The FCA’s business plan 2013/14 shows it will have 2,848 FTE staff at 31 March 2014, just under a quarter of whom will be allocated to supervision.  Given the FCA and PRA are both committed to making more used of section 166 reports we would have assumed the number of staff would diminish, not increase.

Pay rises for FCA (and PRA) staff are “limited” to 2.5% in 2013/14.  The previous year they enjoyed a 3.5% increase.  Many of their private sector equivalents had no such rise; several took cuts in salaries/ hours. 

The continuation of such increases in staff expenditure, year on year does lead us to question why the earlier increases – substantial as they were – have not proved sufficient, or whether such spending was in fact misdirected.  The consultation quotes the PRA which is committed inter alia to embrace value for money, not increase costs in real terms and make every effort to reduce costs.  By contrast, the FCA is merely “fully committed to improving the Value for Money of the services it provides to stakeholders”.  That does not sound as if the new regulator has cost control or efficiency high enough on its agenda. It should do.

Our members are concentrating on core business and making economies; we believe the FCA should do the same – by prioritising the most important areas and discontinuing or winding down less important activities. That would then release resources - whether cash or staff - to devote to the priority areas. There is a feeling that the regulators lose sight of whose money it is spending – firms’, and ultimately consumers’ – as the blank cheque mentality takes hold.  We fully appreciate that effective regulation costs money but high spending on regulation in the past has not necessarily resulted in effective regulation.  There is no clear correlation between high spending regulators and successful ones.

The second area of concern is IT costs.  Year-on-year, the FSA’s IT spend increased but, despite this considerable financial input, the Bank of England made it clear that it did not regard the FSA’s IT infrastructure as appropriate for use by the PRA.  This means that a new IT system will have to be developed for the PRA, while continued changes will have to be made to the FSA/ FCA system – meaning a double spend that will have to be financed by regulated firms during particularly difficult economic times.  So far, we have not seen enough financial control, transparency or accountability regarding this situation and we believe that it is crucial that this is rectified going forward. The FSA’s track record on controlling, and getting value for money from, IT spending does not inspire confidence for the future.

The FSA’s IT costs (including associated staff costs) in 2012/13 were £77.2 million.   Yet in 2013/14, the FCA’s IT costs alone are set to spiral to £85.7 million.  We do appreciate a large proportion is depreciation that was formerly allocated to the FSA, but the rise is nonetheless huge and unjustified.

Together in 2013/14, the increase in both regulators’ IT costs and associated depreciation is a staggering 36% or £43.9 million.   We would like far more regular detail on the projected IT spend of £28.7 million for this, and progress made, plus an explanation of how any over spends will be mitigated.  Informal feedback from officials suggests that the level of increase would continue for 3-4 more years.  This is unacceptable, and even further in breach of the government’s promised ceiling.

Finally, to underline our point about continued expenditure (it can hardly be classified as investment given its surprisingly short life), we would like to draw attention to the history of FSA expenditure on IT before “legal cutover”:

• increased expenditure was flagged for “development of new regulatory reporting forms including development of new, and/or enhanced, IT systems” in 2009/10[6].

• “Further investment is also needed to address the increase in Information Services (IS) development work and the growing role of IS solutions in facilitating new initiatives. Funding will also be required for the ongoing development of our IS architecture and Knowledge Information programme, and general demand for IS support on existing projects.” This relates to 2010-11[7].

• “In particular, as a result of significant changes to our role and structure - e.g.   European-led regulatory change and the UK regulatory change programme - our work has become increasingly data and IT dependent. During 2011/12, we plan to deliver a large number of 'non-negotiable' policies and business initiatives, requiring further investment in the operational platform”. This relates to 2011-12[8].

Yet, despite such expenditure by the FSA, the 2011 HM Treasury publication, “A new approach to financial regulations – building a stronger system”[9], stated:

• “In the short run, however, the transition will involve significant expense to the Bank on premises and IT. . . . The Bank is also clear that in order to contain costs in the long run it would not wish to share in the existing IT systems at the FSA, which have relatively high running costs. So in order to reach a position in which it can both ensure integration and exercise a proper control over future costs, the Bank will need to invest in the transition”.

The impact assessment goes on to state:

• “The FSA has indicated that much of its regulatory IT estate would be in need of amendment or replacement even in the absence of the changes envisaged by the Government’s proposals. New or amended systems for the PRA will therefore be developed as part of ‘business as usual’, though under the guidance of the PRA Transition Programme Board, a joint Bank/FSA body chaired by Hector Sants” (paragraph 11).

• “The FSA legal entity will become the FCA and retain the staff and systems not transferring to the PRA. As with the PRA, there will be significant system development, although this would have been necessary in any event and is not seen as part of the cost of the transition” (paragraph 13).

Our third area of major concern is central and support services.  These are not specified – we know they do not relate to accommodation or office services as these comprise a separate category.  For such a large spend, this is a serious omission.  We acknowledge the FCA “expects to make savings over time” but would have preferred hard figures that could be discussed and monitored over a vague statement.  The assertion that “immediate savings are not achievable” is disappointing, not just for the fact “immediate” is not defined but the overall defeatist air.  Many other organisations use re-organisation as an opportunity to review and cut costs.

Under the FSA in 2012/13, these costs were £115.2 million but in 2013/14 they have risen for the FCA and PRA to £142.6 million.  The FCA’s share is £103.9 million.  This suggests that central and support costs for the FCA are not much less than for the former FSA, even with the addition of its forthcoming consumer credit role.  We do not think this likely.  More detail on these costs, particularly as they are also prone to constant above-inflation increases, is important.

Finally, on accommodation we note the FCA “must retain sufficient capacity to absorb the additional people required to regulate consumer credit from 1 April 2014”.  This suggests the space is left vacant until that time.  We suggest the FCA considers short-term lets to make use of this empty space and use the revenue to decrease its costs.

Allocation

Tables 3.2 shows the allocation of costs with the A.1 (deposit acceptors) fee block having an above-average increase of 20% (the "average" increase of 15% relates to the annual funding requirement, not ongoing regulatory activity).  While 57% of the FCA’s costs are met by solo regulated firms, it is important not to view deposit acceptors as one homogenous class ie large complex multinational banks with seemingly bottomless pockets.  Our members, already funding 68% of the PRA’s costs, are mutuals and any hike in regulatory fees will be keenly felt.

Q3: Do you have any comments on the proposed FCA financial penalty scheme?

We agree that the total retained penalties (now enforcement costs only), received in any financial year, should be applied as a rebate to the

periodic fees paid in the following financial year by firms in the fee blocks set out in table 6.1.  For the A blocks for 2013/14 that will mean A.1 to A.7, A.9 to A.10, A.12 to A.14 and A.18 to A.19.

Q4: Do you have any comments on the proposed method of calculating the tariff rates for firms in each fee block towards the CJ levy and our proposals for how the overall CJ levy should be apportioned?

We are broadly content with the methodology and underpinning concepts of funding the FOS.  We believe it is correct that the largest part of the service’s expenditure is met by case fees ie it is allied to the “polluter pays” principle.  The proposed general levy/ case fee split of 9:91 for 2013/14 is therefore welcome although we are concerned that the forecast split for 2012/13 is 14:86 as opposed to the budgeted 10:90.  We would appreciate confirmation that the same will not happen in 2013/14.

The overall contribution of the I001 industry block (deposit acceptors and home finance lenders and administrators) of 49.6%, similar to the previous year’s budgeted contribution of 49.2%, is noted.   This contribution was, of course, increased dramatically in 2011/12 from the previous year’s 39.1% to reflect actual usage.  We expect that percentage to drop back to the 2011/12 mark once the PPI cases have been resolved.  Maintaining the contribution means that the increases to each industry block are similar, if high for the I001 block at 26%

This year, the Financial Ombudsman Service is seeking £23 million through the general levy. This represents a 30% increase, from the £17.7 million raised last year.  The reason provided for this “adjustment” in chapter 8.11 is “…necessary to bring the general levy back into closer proportion with the broader budget after being frozen for the last four years to take into account inflationary and cost pressures.”  Our members face similar inflationary and cost pressures but do not raise (or “adjust”) prices by 30%.  If they did so, they would lose customers; they, however, do not benefit from a blank cheque book.

We note the FOS has consulted on proposals to change its case fee arrangements, specifically to introduce a new group invoicing arrangement for the largest groups and increase the number of free cases from three to 25 free cases annually per firm/ business.  Chapter 8.9 of this consultation also refers to proposals to marginally increase the standard case fee to £550 for the 2013/14 financial year.  That margin is £50 or 10%.  This is another example of what may seem marginal to regulators but not to firms (or their customers).

Q5: Do you have any comments on the proposed 2013/14 Money Advice Service levy rates for money advice?

We support the proposed revised, three-stage allocation method for 2013/14; given the constraints we believe it is a pragmatic solution.  Those in the A.2 home finance providers’ and administrators’ fee block still face a rise of just under 300%.  It is only a short-term solution and we are most grateful for the FCA’s and MAS’s efforts to engage industry to secure a more equitable and practical long-term approach. 

2013/14’s budget is £2.5 million down on the previous year, a move we welcome.  But we are keenly aware that the money advice budget rose in 2011/12 to £43.7 million, from £32.9 million in 2010/11, a sizeable leap.   The running costs of MAS - as with FCA and PRA - are high with little accountability.  The £43.8 million required in 2013/14 – paid by firms and ultimately their customers – for the provision of money advice for one year is a very significant sum, not justified in the consultation.  We are concerned that certain of the money advice services merely duplicate those which are already widely available.  For example, many commercial offerings provide mortgage calculators so it is not clear what value is added by the MAS’s version.  The initial performance data are disappointing – MAS itself reports on 12 February 2013[10] that 1.23 million consumers used its services between April and December in 2012, against an annual target of 1.9 million.  If the trend continues in the last quarter, 1.64 million consumers will use the service, a deficit of 260,000 or 16%. 

The argument in the feedback section of chapter 9.6 that the costs of collecting a £10 minimum is nil as it forms part of an overall invoice the FCA sends out is misleading.  When the fees and levies are received the £10 still has to be allocated to the MAS budget.  We note that the FSCS[11] has not levied firms owing less than £50 “as the costs would be disproportionate”.  How are MAS’s invoicing costs any different to those?  Given that MAS wants to charge the “beneficiaries” of its work, a more realistic figure such as £100 should be levied.

Q6: Do you have any comments on the proposed 2013/14 Money Advice Service levy rates for debt advice?

The Money Advice Service needs £34.5 million to fund debt advice for 2013/14, the same level as 2012/13.  Unchanged also is the way the service allocates debt advice costs, that is 15% is allocated to fee-block A.1 (deposit acceptors) and 85% to fee block A.2 (home finance providers and administrators). These figures are based on the Bank of England data, which showed household debt as 15% unsecured and 85% secured as at December 2011, which has since shifted slightly

We recognise and support free debt advice.  But the BSA, and others, have argued that other generators of debt should “do their bit” and contribute to the costs of debt advice.  These include HMRC, local government, housing associations, private landlords, utility companies, payday lenders and pawn brokers.

We understand that consideration had previously been given to using consumer credit providers to pay their share but the idea was rejected because the information the OFT holds on them is not sufficiently robust and that the OFT is unable to differentiate between large and small providers[12].  That is a poor reason to burden other firms with the costs.  We strongly recommend that OFT - in conjunction with FCA, which will begin authorising CCA firms from 2014 - carries out data cleansing work as soon as possible as a step to identifying likely fee payers in the future.

Our members tell us that the Universal Credit system is generating a lot of enquiries from their customers.  This has been picked up as a major issue in the Money Advice Service’s business plan for next year.  Another government-generated issue listed in MAS’s business plan is pension auto enrolment.  But in both cases, no contribution is made by the Department of Work and Pensions.

There may be legal hurdles to achieving a better balance in who pays for debt advice but we do not consider that a sufficient reason to continue burdening those perceived to have the deepest pockets.

We welcome the agreement of MAS to review the funding mechanism which will apply to its debt advice work from 2014/15 and it will be important for the constituency of those contributing to these costs to widened to include both CCA lenders and other bodies responsible for generating high levels of consumer debt, such as utility providers and telephone companies.