FSA increases annual funding requirement by £45m

The Financial Services Authority is increasing its proposed Annual Funding Requirement for 2011/12 to £500.5m, up from £454.7m in 2010/11, a gross increase of 10.1%

The regulator says the increase will be borne by larger firms, reflecting the resources applied to intensive supervision of high impact firms.

However, the enforcement fines the FSA imposes during the previous year are returned to the industry by way of discounts to their fees in the following year. This means that in total firms will pay 2% less than last year.

Most firms authorised by the FSA pay a minimum fee, with further variable fees to be paid depending on the type of business a firm conducts.

The gross minimum fee for firms will remain unchanged from last year but, taking into account the enforcement fines discount, the net minimum fee will be 9.4% less than last year: 43% of the FSA’s authorised firms will only pay the minimum fee.

The FSA is increasing its AFR for home finance providers and administrators by £3.4m, 36% increase, which it says mainly reflects enforcement work on the treatment of customers with mortgages in arrears.

The FSA says the increased AFR will be used to fund much of the work that was started last year as the FSA continues to implement key areas of the substantial international regulatory reform agenda whilst maintaining increased supervision of firms and delivering on its statutory objectives.

The key areas that the AFR will be used for in the coming year are:

  • Delivering effective, on-the-ground supervision of firms;
  • Completing the organisational and technological change that underpins the move to an intensive supervisory regime;
  • Continuing to deliver a tough and determined enforcement approach that achieves results;
  • Taking forward the domestic and international policy agenda, particularly in respect of the banking agenda set by the Basel Committee;
  • Ensuring that the wider policy agenda primarily mandated by the European Union is delivered, and;
  • Preparing the FSA move to the new structure of the Prudential Regulatory Authority and Consumer Protection and Markets Authority.

Hector Sants, chief executive of the FSA, says: “The completion of the FSA’s changes to move to a more intensive approach to financial services regulation has inevitably led to some increase in the Authority’s cost base.

’However, we are very mindful of minimising the additional cost to firms and are pleased that net of enforcement fines, the actual amount we will be billing firms will be falling by 2%.

“Longer term, the implementation of new UK and EU policies, along with the cost of managing the transition to two new authorities will continue to put upward pressure on our cost base. However, in general, we would expect these increases to be borne by larger and more complex groups and would hope to minimise the impact on smaller firms,”

The total cost of implementing regulatory reform is yet to be calculated.

The HM Treasury consultation document issued in July 2010 made an initial estimate of £50m and work is under way to quantify this more precisely. In 2011/12, the FSA believes the direct costs will be £10.9m.

The FSA also estimates that there will be substantial indirect costs as staff reschedule other work to create the capacity needed to implement the changes. 

This will involve a temporary increase in The FSA’s risk appetite in some areas, which is expected to predominantly focus on smaller firms and this is reflected in the fee allocation for this year. This will be set out in more detail in next month’s Business Plan.