Peter Cardinali (Ref: CP12/3)
Finance – Fees Policy
Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
29 March 2012
DearPeter,
AFM Response toCP12/03, Regulatory fees
- I am writing in response to this consultation paper, on behalf of the Association of Financial Mutuals. The objectives we seek from our response are to:
- Highlight our concerns at the lack of explanation for the significant increase in costs for insurers; and
- Comments more generally on the proposals.
- The Association of Financial Mutuals (AFM) has 57 members and represents mutual insurers and friendly societies in the UK. Between them, these organisations manage the savings, protection and healthcare needs of 20 million people, and have total funds under management of over £85 billion. Financial Mutuals are member-owned organisations, and the nature of their ownership, and the consequently lower prices, higher returns or better service that typically result, make mutuals accessible and attractive to consumers.
- FSA has presented this year’s fee consultation and business plan as the last one likely to be delivered before the change in regulator. Over the course of less than 15 years FSA has had a profound effect on the financial services sector. But for all the welcome focus on consumer protection and the proper running of organisations, there have been constant concerns about the disproportionately intrusive effect and cost of regulation.
- Regulatory fees are of course one, relatively small, aspect of total compliance costs- though they have continued to rise at an alarming rate. In particular, life insurers (37.3%) and general insurers (36.7%) have seen an increase in the scale of fees that would, anywhere else, indicate a seismic change in business plan.
- However, neither the business plan nor the consultation paper adequately explain why fees have increased so much for insurers, both in absolute terms and relative to other sectors. The absence of any helpful reconciliation is particularly unhelpful at a time when FSA data indicates the number of fee payers, particularly in life insurance, is falling dramatically.
- Equally, at the PRA conference last summer, Hector Sants indicated PRA fees would not be higher as a result of twin peaks regulation; on the strength on CP12/03 we can only conclude that FSA has sought to honour this commitment, not by a prudent and proportionate approach to setting up the new regulators, but by ramping up costs beforehand.
- We would like to think that the future regulators work a little harder to justify and explain their fees, and to allocate resource usage more transparently, in a way that other public bodies are increasingly doing. We note however that we raised similar concerns during last year’s consultation, and see little evidence of desire to be more accountable.
- Answers to specific questions in the consultation are attached. Wewould be pleased to discuss further any of the issues raised by our response.
Yours sincerely,
Martin Shaw
Chief Executive
Association of Financial Mutuals
Answers to specific questions
Q1: Do you have any comments on the proposed FSA 2012/13 minimum fees and periodic fee rates for authorised firms?
We recognise that the overall FSA budget has increased for a number of reasons, including: the transition costs of the new regulators; the further improvement of IT systems; the need to provide pay awards for staff; and underspend in the previous financial year. The justification for these increases is relatively clear from the consultation paper.
With regard to the relative apportioning to fee-blocks, as we state in our introductory comments, we are profoundly disappointed that FSA has sought such a significant increase in fees for insurers without attempting to justify or explain them. It is impossible to reconcile the scale of fees with the amount of incremental activity aimed at the insurance sector. Paragraph 5.3 merely refers to the “focus of our supervisory approach”; however the Business Plan provided late in the consultation process provides little indication of the shift in regulatory focus towards insurers, except for the implementation costs of Solvency II- which are not part of the AFR as they are collected via Special Project Fees- and increased use of S.166s- which again are costed to individual firms.
To better contextualize allocations between fee-blocks, we feel FSA should produce a simple statement for each fee block to explain the change in fees from one year to the next. This kind of exercise is expected of regulated firms by FSA supervisors at a far more detailed level, so it is unrealistic of FSA to avoid good accounting practices.
At a simplified level we would expect to be able to understand the change in fees by consideration of factors such as (reproduced from our e-mail of 26 March):
-General increase in AFR (15.6%); plus
-Extra costs of dual supervision
-A disproportionately higher proportion of the overspend from 2011/12
-A proportionately smaller amount to be recovered from fines
-The use of aged tariff data which means significant changes in individual businesses are only reflected two years afterwards
-A reduction in the number of firms paying the AFR
-Relative increase in supervisory activity
We would also add that a number of AFM firms have used the fees calculator to estimate FSA fees for 2012/13. These indicate significant variances to the average figures for insurers, with some reporting projected increases of over 50%.
In relation to firms paying the standard minimum fee, and exceptions, we are content.
Q2: Do you have any comments on the proposed FSA 2012/13 minimum fees and periodic fee rates for fee-payers other than authorised firms?
We have no comments.
Q3: Do you have any comments on which basis we should use to calculate periodic fees for the issuers of regulated covered bonds?
We have no comments.
Q4: Do you have any comments on the proposed IMAP SPF for 2012/13 or the proposed circumstances under which it will be payable by firms?
We agree with the general approach.
It is surprising however that FSA has been relatively poor at identifying how much it needs to collect in SPF for Solvency II work (the figures indicate that of £9.2 million collected for 2011/12, only £4.1 million was actually spent). Even allowing for delays in finalising the rules, each year FSA has collected significantly more than it has spent, and this suggest imprecise budgeting and generally inefficient use of firm resources. It also means that whilst Table 9.1 indicates a reduction in fee collected of 30%, the resource cost FSA expects to use is 280% higher (from £4.1 m to £11.5 m).
It is not clear whether the same approach is needed this year as that described in Table 9.1, to refunding the surplus and budgeting anew, where the population of firms is different. We would appreciate confirmation on the policy statement on this.
Q5: Do you have any comments on the proposed non-IMAP SPF for 2012/13?
We agree that the non-IMAP SPF should be levied across firms within scope of Solvency II, at a rate that mirrors their AFR.
Table 9.1 indicates that FSA collected £17.6 million in SPF for 2011/12, and spent £12.4 million. The estimated budget for 2012/13 is £19.5 million, and this indicates an increase in resource usage of over 57%. As per our answer to question 4, it is not clear from the commentary in paragraph 9.17 why the proposed increase is so significant. These are significant costs and the lack of commentary does little to demonstrate that FSA has a clear plan on how the funds will be spent.
Q6: Do you agree with our proposal to: replace the agent bandings for authorised payment institution applications with an agent registration fee; introduce an agent notification fee in arrears for all notifications during the previous calendar year; and extend this structure to authorised electronic money issuers?
We have no comments.
Q8: Do you have any comments on the proposed revised hourly rates for restructuring SPFs?
We accept the need to adjust the hourly rates, though it my be useful in the policy statement to clarify to what degree FSA has benchmarked its increase in costs externally.
Q9: Do you agree with our proposal to direct fund managers to the guidance in SUP16 Annex 25G when calculating the value of their derivative instruments, subject to the proviso on underlying assets that are reported separately within the same group?
We have no comments.
Q11: 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 note that there is a significant shift between fees collected by levy to those collected by case fees, from 33: 67 to 9: 91 (note there is an error in the forecast column of Table 12.3). This reflects the addition to reserves in 2011/12 of £25 million rather than any reduction in the CJ levy. We are comfortable with this approach, and given the sharp increase in FSA fees, the return of the FOS levy to the 2010/11 level is welcome.
Q12: Do you have any comments on the proposed 2012/13 Money Advice Service levy rates for money advice?
The MAS has provided a helpful overview of its planned activities and objectives. This is welcome. Whilst politicians appear keen to want to challenge the MAS wage bill, we are more surprising that nearly 50% of its budget (£20 million) is allocated to marketing- this presumably reflects the high costs of media advertising as the preferred source of spend. Whilst we accept the need to raise awareness of the Service, it would have been helpful to see an assessment of the effectiveness of 2011/12 advertising spend.
Q13:Do you have any comments on the proposed 2012/13 Money Advice Service levy rates for debt advice?
We have no comments.
AFM response to Treasury consultation on Solvency II / 1