The Cost of Regulation study commissioned jointly by the FSA and the Financial Services Practitioner Panel (the Panel) and prepared by Deloitte & Touche LLP has today been published. Repeated industry surveys undertaken by the Financial Services Practitioner Panel found that the costs and burdens of regulation to be possibly the single biggest issue of concern to regulated firms. Responding directly to findings of the Panels last survey of regulated firms in 2004, the FSA decided to undertake, in partnership with the Panel, a gritty and in-depth cost accounting study into regulatory costs, the scope of which was announced in March 2005.
The Study focuses on three specific industry sectors – corporate finance, institutional fund management and investment and pension advice. The objective of the study has been to identify specific rules from the FSA Handbook in these sectors where regulatory costs are not justified by the benefits they aim to secure.
Roy Leighton, Chairman of the Financial Services Practitioner Panel said, "The low incremental costs of regulation in the corporate finance and institutional fund management sectors suggests that regulatory burdens in wholesale markets are generally not seen as a barrier to the nation's international competitiveness, and may be one significant factor among many in its popularity as a destination for mobile capital and investment banking activity."
Across all three sectors, the direct FSMA fees collected by the FSA and compliance with record keeping arrangements spread across a large number of separate rules incurred the highest incremental regulatory costs. Unsurprisingly the retail-oriented investment and pensions advice sector had the highest incremental regulatory costs; including human resource related activities such as training & competence and compliance with certain of the Conduct of Business rules.
Mr Leighton added, "The highly prescriptive nature of these requirements as currently framed in the FSA Handbook is what generates the significant incremental costs in the retail sector. The key issue is what the FSA does with these results. The Panel expects the FSA to take quick and decisive action by removing rules from the FSA Handbook where their costs are not proportional to the benefits that they were intended to secure, and I urge the FSA to produce a clear and detailed action plan to do just that."
The FSA's ongoing shift towards a more principles based approach to regulation with the focus on outcome rather than process along with its deregulatory measures should have consequential cost advantages for firms. The Panel will use the results of the study to engage in a constructive debate with the FSA about the burden of regulation and will actively monitor the FSA's response.
"The industry rightly has an expectation that this study will contribute to seeing real and meaningful improvements in the way that it is regulated and, specifically, on the issue of costs. The Panel urges the FSA not to let them down. The FSA is committed to Better Regulation - we will play our part in ensuring that practitioners support those efforts," Mr Leighton added.
Notes for editors
A representative sample of 68 firms of all types and sizes were surveyed from these sectors using data based on their audited financial results for 2004. The key aim was to identify which individual rules were most costly for participating firms, thereby quantifying those costs incurred by firms in undertaking regulated activities which would not be incurred in the absence of the Financial Services and Markets Act 2000 (FSMA). These costs were defined as incremental regulatory costs and were analysed by Deloitte on a rule by rule basis.
The findings pre-date several new instances of regulation; the most obvious ones being the Treating Customers Fairly (TCF) initiative, Depolarisation, the incoming Markets in Financial Instruments Directive (MiFID) and the recent introduction of electronic reporting.
The Financial Services Practitioner Panel was established under the Financial Services and Markets Act 2000 to represent the interests of practitioners and is independent of the FSA. Members are drawn from regulated institutions and market users at a senior level. Membership rotates to ensure a balance between consistency and new input. The Panel was set up on a non-statutory basis in November 1998 (as the Practitioner Forum) and became a statutory body in June 2001.
The current members of the Panel are: Roy Leighton, Chairman, Nymex Europe Limited (Chairman); Jonathan Bloomer, Managing Director, Operations Europe, Cerberus UK Advisers LLP (Deputy Chairman); Alan Ainsworth, Former Deputy Chairman, Threadneedle Asset Management; Matthew Bullock, Chief Executive, Norwich and Peterborough Building Society; Russell Collins, Head of Financial Services Practice, Deloitte UK; Clara Furse, Chief Executive, London Stock Exchange; Douglas Gardner, Distribution Director, Positive Solutions; Mark Rothery, Chief Executive, Ancient Order of Foresters Friendly Society; (Chairman of the Smaller Businesses Practitioner Panel); David Hardy, Chief Executive, London Clearing House; Colin Keogh, Group Chief Executive, Close Brothers Group; Gordon Pell, Executive Chairman, Retail Markets, Royal Bank of Scotland Group; Nick Prettejohn, Chief Executive, UK Insurance, Prudential; Andrew Ross, Chief Executive, Cazenove Fund Management; Patrick Snowball, Group Executive Director, Aviva UK; Alan Yarrow, Vice Chairman, Dresdner Kleinwort Wasserstein.
Further information on the role and work of the Panel are available on its website: www.fs-pp.org.uk