6. How we operate

6. How we operate

Our budget 2016/17

Our annual budget reflects the cost of the resources we need to carry out our work in 2016/17.

The key elements of our budget are:

  • The cost of our operating activities (our Ongoing Regulatory Activity), the largest element of which is our people.
  • The total amount we charge the industry to fund our plans (our Annual Funding Requirement).
  • Capital expenditure for the development of our information systems and new regulatory and operational requirements.

Operating costs

Our budget for our Ongoing Regulatory Activity (ORA) for the year is £502.9m, an increase of £23.9m (5.0%). This increase is solely due to the introduction of Consumer Credit into our ORA budget. Excluding new responsibilities for Consumer Credit, our budget has reduced by £7.6m (1.6%) to £471.4m as we have re-prioritised and delivered savings in a number of non-staff costs. In addition, depreciation has decreased as a result of some core IT assets being fully depreciated and lower capital spend on key strategic projects.

Operating costs (ORA) 2015/16 £m 2016/17 £m
Staff costs 279.9 316.8
IS costs 95.2 97.2
Depreciation 47.3 39.3
Accommodation and office 30.5 31.5
Enforcement case costs 10.7 8.3
Professional fees 17.6 16.2
Training, recruitment, travel 16.2 12.7
Printing and publications 3.9 4.2
Other costs 3.1  1.8
Sundry income (25.6) (25.2)
Total ORA 479.0 502.9

The new Consumer Credit ORA budget of £31.5m mainly comprises staff costs in our Supervision, Enforcement & Market Oversight and Strategy & Competition divisions.

"Excluding new responsibilities for Consumer Credit, our budget has reduced by £7.6m as we have re-prioritised and delivered savings in a number of non-staff costs"

Annual Funding Requirement (AFR) 2015/16
£m
2016/17
£m
Movement
£m %
Non Consumer Credit:
ORA budget 479.0 471.4 (7.6) (1.6%)
Recovery of scope change activities 2.6 10.2 7.6 292.3%
Non Consumer Credit AFR 481.6 481.6 0.0 0.0%
Consumer Credit:
ORA budget 0.0 31.5 31.5 -
Recovery of scope change activities 0.0 6.2 6.2 -
Consumer Credit AFR 0.0 37.7 37.7 -
Total:
Total ORA budget 479.0 502.9 23.9 5.0%
Total recovery of scope change activities 2.6 16.4 13.8 530.8%
Total AFR 481.6 519.3 37.7 7.8%
Financial Penalty Rebate (43.6) (49.6) (6.0) 13.7%
Fees payable 438.0 469.8 31.8 7.2%

Annual Funding Requirement

Our AFR for 2016/17 is £519.3m, an increase of 7.8% which is again due to the first year of Consumer Credit in our ORA budget. Our AFR includes our ORA budget costs and the costs we need to recover for changes in scope to the FCA’s regulated activities (including new responsibilities). In 2016/17 we will recover scope change costs for Accountability in the Banking Sector, the Mortgage Credit Directive and Consumer Credit. Consumer Credit firms have not been billed for the full costs of regulation during the setup and transition period and we will recover the estimated £62m outstanding deficit over ten years at £6.2m per annum.

Capital expenditure

Our capital expenditure budget reflects the ongoing delivery of IT systems and infrastructure development and refresh, as well as implementing the necessary IT change driven by legislation such as the Markets in Financial Instruments Directive (MiFID) and Regulation (MiFIR). In 2018 our leases for our Canary Wharf properties come to an end and we have signed an Agreement for Lease for 20 years to move to The International Quarter (TIQ) in Stratford. We will incur fit out costs to get the building ready for occupation. Our current intention is to fund these costs by external financing, the costs of which will be recovered against the rent free period.

Capital expenditure 2015-16
£m
2016-17
£m
IT systems development 19.6 22.0
IT infrastructure 21.0 17.4
Property, plant and equipment 2.0 1.0
Total capital excluding TIQ 42.6 40.4

 

TIQ 1.9 25.0
Total capital 44.5 65.4

Payment Systems Regulator

The Payment Systems Regulator (PSR) is a separate legal entity based at the FCA, with its own board and statutory objectives. Details of its funding can be found in the PSR’s Annual Plan.

Applying financial penalties

We must pay to the Treasury all the financial penalties that we receive, less certain enforcement costs.

We use these retained penalties to reduce our fees for firms, apart from the fees of the penalty payer themselves. We estimate the financial penalty rebate to be £49.6m in 2016/17.

Impact on our fee payers

Every year we consult with our fee payers on how we allocate our Annual Funding Requirement (AFR) between fee-blocks and how we set our fee rates for the forthcoming financial year. We do this via our fees consultation paper published in April 2016.

Our consultation paper summarises the main elements of our ORA budget and scope change costs and explains how we have allocated these across fee blocks, as well as any changes being made to the fee blocks. Among other things, our consultation paper also explains any proposed change to the minimum fee and gives details of the financial penalty scheme, our estimated financial penalty rebates for 2016/17 and our current and future proposals for consumer credit fees. The chart below reflects how we will be funded by industry sectors as proposed in our April 2016 consultation paper.

Value for Money

Our overarching Value For Money (VFM) strategy is to maximise the impact of delivering our statutory objectives and desired outcomes, while minimising costs. Our drive to deliver year-on-year improvements in effectiveness, efficiency and economy continues.

VFM criteria are being embedded in our decision-making process at all levels. This, together with reviews of our internal processes, benchmarking, and ensuring flexibility in our workforce, will drive further efficiencies.

We will focus on embedding VFM into our culture through a number of measures including a training and communications programme. We will work closely with other regulators to share expertise, best practice and resources where possible.

We will continue to develop a constructive relationship with the National Audit Office (NAO) to address recommendations coming from its reviews of the FCA. As the NAO observes, our strategic approach is evolving and we will be using the NAO’s recommendations to build on our current VFM strategy.

Our people

It is important that we attract and retain the best regulatory talent. The FCA’s employees are key to ensuring we meet our objectives, so we invest in their development to enable them to have the latest knowledge and capabilities. In addition to a rolling programme of events to keep staff informed of current economic and market developments, the FCA Academy, now in its third year, provides high standards of technical and management training. In 2016/17 we will expand our MSc in Financial Regulation with Henley Business School internationally, with plans to engage with overseas regulators and stakeholders. We will also expand our successful secondment programme among a wider range of regulated firms and consumer organisations.

Deepening the diversity of our workforce remains a priority. Our work on diversity has already delivered encouraging results, especially in early careers. We have seen an increase in general BAME applications from 42% to 47%, and an increase in offers for graduate programme positions from 18% to 27%. In 2016/17 we aim to build on this success by working more closely with our local community and using other tools to reach young talent.

Reporting on our achievements

The main way in which we report on our performance is through our Annual Report. To make our work more transparent throughout the year we also publish a quarterly data bulletin, which provides information about what we do and the markets we regulate.

In the Annual Report we report on a range of performance factors prescribed by FSMA, and self-imposed ones, such as the delivery of our business plan commitments, outcome measurement, operational effectiveness and efficiency, value for money and the key work we have delivered. This year, we have also added indicative measures that are specific to the priorities.

We also include several measures that analyse the efficiency and effectiveness of our work. Measures for our authorisations function include, for example, how we determine applications within the statutory service standards, the average time it takes us to make a decision on different types of cases, feedback from stakeholders on our process and quality assurance results. Examples from other areas include the redress we obtain for consumers, how we use our enforcement powers, the outcomes of our enforcement activity, the number of financial penalties we have levied, the number of fines and prohibitions and the impact of specific interventions.

We also use an outcomes-based performance framework, which examines the external markets we regulate and assesses the impact of our work on our statutory objectives in different financial sectors.

Achieving our outcomes will take time. We will continue to monitor them to assess whether progress is being made, and where we need to take further action.

Analysing our performance against our statutory objectives

We set out our framework for analysing our performance against the statutory objectives. We have a pragmatic approach to measuring how we perform against our statutory objectives and take into account the way we use our resources. This means we use all available research and analysis, rather than solely relying on designing large research programmes ourselves.

Measuring outcomes is challenging and regulatory success is hard to judge, especially as our success is often achieved by preventing problems from happening or worsening, which may not be as visible. Some of the difficulties we encounter include establishing cause-effect relationships, time lags between our actions and their impact and our limited control over issues that are heavily affected by external factors and the actions of others. These include market conditions, the general economic state, the work of other regulators and the political agenda.

Our overall framework, and its outcomes, indicators and the performance measures will evolve over time as we develop our performance framework further and identify better measures.

Working in partnership

We are an integral part of the UK’s wider financial regulation framework. This involves a number of public bodies, each with their own duties and objectives. They include the Prudential Regulation Authority, the Bank of England, the Payment Systems Regulator, the Competition and Markets Authority, the Money Advice Service, the Pensions Regulator, the Financial Ombudsman Service, the Financial Services Compensation Scheme and the Treasury.

We work closely with these public bodies and others to advance our objectives. We will work closely with Government to provide support as they introduce any changes resulting from the Public financial guidance review consultation.

We have a statutory Memorandum of Understanding with the PRA that sets out the responsibilities for each regulator. We regularly monitor performance against this, and coordinate and cooperate with the PRA across all relevant activities, which we actively and jointly oversee.

We work with the Bank of England, the Financial Ombudsman Service, the Financial Services Compensation Scheme, the Competition and Markets Authority and the Money Advice Service. As a member of both the UK Regulators Network and the UK Competition Network we engage with broader regulatory issues and priorities.

"Achieving our outcomes will take time. We will continue to monitor them to assess whether progress is being made and where we need to take further action"

During 2016/17 we will continue to work with the Money Advice Service including on its restructure to a new, slimmed down money guidance body charged with identifying gaps in the financial guidance market and commissioning providers to fill these gaps to ensure that consumers can access the debt advice and money guidance they need.

We also work with the Serious Fraud Office, the National Crime Agency, the City of London Police and other enforcement agencies to take action against firms and individuals who may have committed financial crime.

We also work closely with the Payments Systems Regulator (PSR), the independent economic regulator for the £75 trillion payment systems industry. The PSR is a subsidiary of the FCA, which was incorporated in April 2014 and became fully operational in April 2015.

Many new rules we make come from the need to implement European policy. The European Supervisory Authorities (ESAs) have significant powers to propose draft rules and make decisions that have major implications for national supervisors and firms.

We work closely with other European regulators and the ESAs, in particular the European Securities and Markets Authority (ESMA), and are influential in ensuring that we:

  • Assist in and influence policy making.
  • Are properly informed about relevant risks.
  • Avoid duplication of regulatory activities.
  • Improve the oversight of internationally active firms.
  • Adopt a consistent approach to common European Community requirements.

FCA statutory panels

We are required to consult on the impact of our work with four statutory panels. These panels represent the interests of consumers, practitioners, smaller regulated firms and markets. We also consult with the Listing Authority Advisory Panel.

They play an important role in both advising and challenging us, and bring a depth of experience, support and expertise in identifying risks to the market and to consumers. We consider their views when developing our policies and when deciding and implementing other regulatory interventions. Each panel publishes its own annual report. The Panels are:

The Consumer Panel

This represents the interests of consumers, monitors how far we are fulfilling our statutory objectives with regard to consumers when developing rules or policy and provides us with advice and challenge.

The Practitioner Panel

The panel represents the interests of practitioners. It provides us with external input from the industry as a whole.

The Smaller Business Practitioner Panel

This represents smaller regulated firms, who may otherwise not have a strong voice in policy making.

The Markets Practitioner Panel

This panel reflects the interests of practitioners who are likely to be affected by our functions involving markets.

The Listing Authority Advisory Panel

This non-statutory panel advises the FCA on policy issues that affect issuers of securities, and on policy regulation proposals from the FCA listings function.