Mark Sands and Tessa Norman
The Treasury is facing calls to revisit the way it handles FCA fines amid mounting concern about a lack of transparency in the current system.
Historically, excesses in fine revenue were directed back to firms to reduce overall regulatory costs. However, regulatory fines handed out since April 2012 have passed directly to the Treasury instead, swelling Government coffers by £736.7m as at the end of April 2014.
The FCA has yet to report figures for 2014/15, but figures published on its website show it levied a total of £1.4bn in fines for the 12-month period. If enforcement costs remain at their current level of around £40m, the FCA will have paid more than £1.35bn to the Treasury during the year.
Since April, a further £789m in fines has been levied on financial services firms, putting the total collected so far at over £2.9bn.
So where does that pot of money go? The Government has previously said the money from huge Libor and forex fines is being spent on charitable causes and the NHS, but in reality it is unable to specifically account for the cashflows.
So is now the time to review the way FCA fines are allocated? Should the money instead be used to lower the fees of firms who are not guilty of wrongdoing, rather than to boost the Exchequer?
A Treasury spokesperson said: “All FCA fine income is paid into the Consolidated Fund. The Treasury then allocates it to relevant departments. As with all public spending, it is then accounted for in departmental accounts which are audited by the National Audit Office.”
There are no set rules for how fine income allocated to government departments can be spent, but a spokesman says all fines related to Libor fixing are channeled into military charities, among other good causes, while all fine income from Forex rigging is earmarked for NHS spending.
However, despite repeated attempts by Money Marketing over several weeks, the Treasury was not able to specifically set out how all the money had been spent.
Social Market Foundation chief economist Nida Broughton says: “Externally it is quite hard to hold the Treasury to account for exactly what it is doing.
“It’s important to make sure that things like FCA fines are separated out, but it is hard to keep tabs on where that money is going, particularly in cases when you have confusing statements made suggesting that a one-off sum will fund an ongoing expense.”
Since the rules were changed, the Treasury says more than £1bn of fines related to forex manipulation has been used to support the NHS, and that £450m of Libor penalties has been awarded to charities, such as supporting air ambulances and funding veteran travel to Normandy.
In April a further £227m Deutsche Bank fine for Libor rigging was earmarked for the creation of 50,000 new apprenticeships over three years.
However this still leaves over £1bn unaccounted for.
Experts argue the fee income would be better spent elsewhere, rather than using the cash to deal with “a fairly desperate public funding problem”.
Demos research director Duncan O’Leary says funding could be directed towards financial education or debt advice.
He says: “No doubt giving money to the armed forces is popular, and it’s a very deserving cause. But one way of building trust with the public would be to say ‘this money has come into the Government for this reason, and so we will spend it on something related’.”
Almary Green managing director Carl Lamb says: “This should be more transparent so we can see where this money is going, and if it’s coming from our sector then it should be recycled back into our sector. The access to advice is decreasing week by week and the cost of running a business is becoming unsustainable between the costs of the Financial Services Compensation Scheme and the regulator, who seem to be able to charge whatever they want.”
Holden & Partners partner Steven Pyne agrees. He says: “Everyone likes to know where government money is being spent. In this case – whether it’s being invested back into the financial services community either by bringing costs for firms down generally or through better educating consumers so they are more aware of the risks and pitfalls out there. We are moving towards an age where transparency is becoming more and more important and it’s an expectation that companies and organisations are transparent, so why shouldn’t we have the same expectation of the Treasury in how this money is used?”
The lack of accountability over the current model, where the Treasury highlights how some but not all of the fine money is spent, has prompted stakeholders across the industry to call for change.
Law firm King & Wood Mallesons partner Tim Dolan suggests fine income could be used to prevent future non-compliance, including helping firms understand what rules they need to comply with, and how.
Dolan says: “After that there would still be an awful lot of money left over, which could be used to reduce the cost of FCA fees for all firms.
“The downside of using it to reduce the levies of firms in particular fee blocks is if there is a scandal involving a number of firms in a sector, they effectively get their fine reimbursed.”
Independent regulatory consultant Richard Hobbs says FCA chief executive Martin Wheatley has already raised concerns that the current fines system is closer to a penalty on shareholders than individuals. Hobbs argues the regulator may seek to reform the system if fines begin to decrease in scale.
“When the revenues from fines start to fall, the FCA is likely to revert back to the old system of using fines to offset regulatory fees for specific fee blocks.”
Similarly, Pinsent Masons senior associate Michael Ruck suggests the prospects of reforms to lighten any perceived burden on financial services firms is hard to square from the consumer’s point of view, particularly while sums are currently going to more popular causes.
He says: “It would be difficult from a political perspective to switch back and create a justification for why charitable and public services money should go back to an industry which has an issue with its reputation even now.
“What could the industry do to help improve its case? It can seek to improve the public perception of the industry. It needs to improve its reputation. Then we will gradually see a small increase in the chance the fines will be returned to the industry.
“But also as standards improve, claims on the FSCS and others would be reduced and therefore costs would fall. The industry could also put a slightly different perspective on it: rather than the money being perceived to be returned to firms, if the FSCS was funded by a proportion of FCA fines then the money would be seen as being used for consumer compensation. The industry should focus on the consumer benefit.”
A solution to the FSCS problem
Wrapped up in the issue of where the FCA fine money should be spent is the question of mounting regulatory costs, and particularly the levies imposed by the FSCS.
In April, the FSCS announced that the 2015/16 levy for life and pensions intermediaries would almost double from an expected £57m to £100m as a result of rising Sipp claims.
The news came after life and pensions advisers were hit with a £20m interim levy in March.
The FCA has committed to a funding review of the FSCS by the end of 2016, and is expected to issue a discussion paper in the autumn.
And last week FSCS chief executive Mark Neale invited firms to submit suggestions for “fairer” alternatives to the lifeboat scheme’s funding model.
He said he understands advisers’ frustration that they believe firms with low risk business models have to “bail out” riskier firms.
Personal Finance Society chief executive Keith Richards says: “It is time to explore alternative options such as the introduction of an investment or policy levy which would make the cost more explicit and transparent to the client.
“It could be deducted from the client’s premium or funds as a cost and collected from the provider or platform on an annual basis.”
Apfa director general Chris Hannant says: “A product levy is the most workable solution. The FSCS’s reservation is the potential to over or under collect levies each year. But if the levy is set at a conservative level initially, any surplus could be used to help smooth out bumps in future years.”
Many argue the system must be changed to ensure lower risk firms pay less, and that FCA fines should be redirected to this end.
Consultant and former FSA head of retail policy David Severn says: “The FCA needs to use both carrot and stick, and reward good firms through a risk-based approach to regulatory fees and levies.
“The FCA should retain fines and use them to reduce the costs of all well managed firms, not just in the fee block of the firm where the fine was made.”
Richards says: “Despite evidence of the positive progress being made since the RDR, coupled with FOS claims against advisers falling in 2014/15 and accounting for less than 1 per cent of complaints, advisers have seen their FSCS and FCA fees rise.
“Redirecting regulatory fines to fund the increasing cost of regulation and the FSCS would be the right thing to do in both the public and advice profession’s best interest.”
In April 2014, the FCA banned two partners of advice firm 1 Stop Financial Services. The company advised customers to transfer £112m into Sipps and directed them to pay the amount it would have fined them – £490,100 – to the FSCS.
It is the only time the regulator has directed a fine to the lifeboat scheme.
A spokeswoman for the FCA says: “We did this because essentially the firm was winding up so there was no money left to fund redress to customers affected. Also 1 Stop was a partnership and not a limited company. We wouldn’t be able to say whether we’d do this again as this outcome was very case specific.”
With the Treasury unable to give a detailed account of how it spends the money it receives in fines, the clamour for reform, and how this could feed into a reformed FSCS funding model, is only set to grow louder.
Independent regulatory consultant Richard Hobbs
When the FSA started, the fines were sufficiently small that you could use them to offset the fees of other firms in relevant fee blocks. That is a common approach to regulation. But when the fines started to grow, particularly for the banks, that model no longer works because the fines are far greater than the regulator’s budget. It would result in some firms paying no fees at all for several years and the regulator running large surpluses.
Miscellaneous receipts for the Government tend to go into something called the consolidated fund: essentially a big bucket for all the money.
Once it is in there, it can go anywhere. The Treasury has been using it to deal with a fairly desperate public funding problem.
As to the future, FCA chief executive Martin Wheatley has already been making noises saying these fines on shareholders do not work very well and the FCA ought to be going after individuals. The era of these jumbo fines is coming to an end because we are running out of systemic issues that the banks can be held accountable for. When the revenues from fines start to fall, the FCA is likely to revert back to the old system of using fines to offset regulatory fees for specific fee blocks. I do not see why an IFA should have a windfall because a bank has misbehaved – that seems fundamentally unfair.
Jason Witcombe, Director, Evolve Financial Planning
My gut reaction is it seems reasonable for it to be kept within the industry rather that fines being seen as a profit centre in their own right. If fines are being used to pay for things like the NHS or apprenticeships then there’s almost a pressure on those fines to keep continuing to keep that funding up. It would seem cleaner for those fines to be used for industry purposes rather than funding something completely unrelated.
Patrick Connolly, Head of communications, Chase De Vere
We are not overly concerned where the money goes, but we don’t think that financial services companies have any right to benefit from the misdemeanors of other companies.
It seems pretty sensible that the money goes to the Treasury and it’s difficult to argue if a significant proportion of that is spent on good causes.