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Down the plughole: Where has all the FCA fine money gone?

plughole

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?

Transparency

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 alternatives

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.

EXPERT VIEW

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.

ADVISER VIEWS

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.

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Comments

There are 18 comments at the moment, we would love to hear your opinion too.

  1. Richard Hobbs quotes !! “I do not see why an IFA should have a windfall because a bank has misbehaved – that seems fundamentally unfair.”

    Richard I would argue; We don’t get a windfall but our clients do, in effect we then have to pay double, we pay our fees then we have to pay interim levies which should be covered by the fine money, its these fees and interim levies that get passed on to out clients !!

    • And another thing Richard !! you also say; The Treasury has been using it to deal with a fairly desperate public funding problem.
      Its not the financial services industries responsibility to prop up the public funding problem, this lays squarely at the door of the government in force at the time !!

  2. Shouldn’t we get a no claims bonus if we have a good record. What happened to the good guy premium that we all heard about ?

  3. John Hutton-Attenborough 11th June 2015 at 11:37 am

    @PC – “but we don’t think that financial services companies have any right to benefit from the misdemeanors of other companies.”

    So are you then saying that it is fundamentally ok for good financial services companies to continually have to pay for the misdemeanors of other companies?

  4. The fines should be used to reduce the fees payable by those who have not transgressed.

    Instead the Government steals it to help prop up public spending

  5. This issue is about as fair as the victim surcharge fund payable by someone who has been convicted for say speeding in addition to their fine, for a completely unrelated offence.

    As has been mentioned, what has Libor fixing etc to do with the average IFA firm sitting on the High Street? Additionally where does the issue of regulatory deficiency that allowed such events to occur come into play?

  6. As advisers we comply with treating customers fairly, and must constantly update our audit trails.
    It seems the FCA don’t practise what they preach, there should be an audit trail published each year end showing exactly where the money has gone. And on that note all of the income from fines should be channelled back to the Financial Services Industry and be used to reduce the exorbitant fees & levies we have to pay. But as usual the FCA are unaccountable to us mere mortals.

  7. Julian Stevens 11th June 2015 at 1:48 pm

    It’s the same old same old ~ our industry is regarded by the government as an exhaustible fount of money to be plundered relentlessly. What irks me (amongst various other injustices) is that the government said it was going to use all FCA fines to provide the best possible care for our injured servicemen and women (and none of us would argue with that). But clearly it’s found that by giving the FCA an open mandate to ramp up its fines by any amount it feels like, so much has come pouring its way that it’s now allocating it to all sorts of other things. For its part, the Treasury claims that because all these hundreds of millions are going into some sort of general pot, it’s unable to tell us what they’re all being spent on. I don’t believe a word of it ~ if the Treasury wanted to, I’ll bet it could find out where every penny’s going.

  8. Ever since Osborne announced that he was misappropriating the fines and using the excuse that it was for war veterans (not), I have been saying that not re-applying it to reduce both regulatory and comensatory costs is in fact an extra tax on financial services. Will anyone tell me that I am wrong?

  9. 1.Transparency. Don’t be silly – it is we who have to be Transparent – the Westminster Numpties are past masters at opacity. As ever one rule for us and another for them.

    2. Mr Hobbs comments “…….the regulator running large surpluses”. Well I really can’t see what’s wrong with that at all. After all the Regulator is primarily there for the benefit of the public, but we have to pay. That seems a little hard when there are funds to ameliorate the situation.

  10. Transparency… hahahahahaha… legalised crooks! Or so it would seem when you read the article.

    Why not have a system that covers the regulation costs, keeps the fees at a fixed cost with a possible ‘no claims bonus’ for the good firms and any surplus to go to good causes?

  11. Julian Stevens 12th June 2015 at 9:52 am

    Greg Power ~ What you suggest is a system of regulatory dividends, which has been talked about in regulatory circles, by Martin Wheatley I believe, yet nothing has actually happened, just like:-

    1. a framework for simplified advice (complexity keeps regulators in business, even though both practitioners and most of our clients would welcome vastly less of it),

    2. a fairer funding model for the FSCS (the idea of a product levy has been consistently rejected with no satisfactory explanation beyond stubborn adherence to the mantra that consumers shouldn’t be required to contribute towards their own protection),

    3. an end to regulation by hindsight (which Howard Davies many years ago declared to be “not helpful” and which Martin Wheatley hinted soon after taking office that the FCA would seek not to perpetuate) and

    4. consistency of FOS adjudications (both in line with FCA policy and from one case to another).

    That said, as far as the Treasury confiscating all FCA fines is concerned, there’s not much Martin Wheatley can do. If the Treasury instructs him that the FCA must hand over every penny it raises by way of fines, he can hardly say No, that’s not fair, it’s effectively a stealth tax on the industry. The response will have been Well, this is what’s been decided and you have to do what we tell you, so just get on with it and don’t argue. Politics and regulation are a poisonous emulsion and the FCA long ago quietly dropped the FSA’s longstanding yet patently mendacious claim to be independent of government.

    • Julian; re “confiscation of fines by the treasury” I believe MW doesn’t have to hand over the money ? The regulators are “independent” of government and only answerable to the treasury !

      Now in the real world we all know they really not independent !, which suits both the FCA and government as it gives them (GOV) complete deniability, access to the spoils of war, and for the FCA total immunity to prosecution, and control to earn what they like.

      The real big argument is…… if the government wants their cake and eat it, then they should pay for it !!!

      Which in turn is why they keep up the pretence that the FCA is independent so shmucks like us continue to pay for everything, in a never ending circle of financial slavery locked into the (you have to say) very clever FCA dogma.

      IMHO this is a human rights issue !

  12. “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…” I thought this was supposed to be a temporary redirection, the problem now is having comitted the theft and changed the rules to plug holes in funding elsewhere, the Treasury think no one will notice. We Mr Osborne we have noticed and we do notice. It’s a form of theft, double taxation and, frankly, quite scandalous.

  13. Why not split the fines three ways. 1/3rd to reduce the cost of the FCA, 1/3rd to charities who give advice to the less fortunate, such as Age UK, Shelter, CAB as well as the Pension Wise partners like TPAS and CAB, the rest to help rehabilitation of servicemen and women as well as those who need long term re-hab from accident/illness.
    Thus the levies can be lower, those who are in trouble from the governments reduction in benefits can at least get good advice/guidance and those who are capable of making a positive contribution to society with help can also benefit.
    This would act like a tax on the greedy, the cheats and those with little moral compass.

  14. Julian Stevens 15th June 2015 at 9:49 am

    DH ~ The FCA used to claim (falsely) on its website to be independent of the government and that claim remained for a short while after it was rebadged as the FCA but was then quietly airbrushed out. However, the independent tag seems now to have been reinstated with the words “we’re an independent body and we do not receive any funding from the Government” ~ which is a bit slippery, isn’t it, as it implies independence just because it’s funded by the private sector. This of course raises the question: In just what way is the FCA independent on any parameter other than how it’s funded? It plainly isn’t. In all other respects it’s a government body.

    Another modification to the FCA’s website is that it no longer suggests, as it used to, that the firms who fund it do so on a voluntary basis, as if it were some sort of quality club of which we’re all jolly glad to be members for the greater good. It now admits to “charging them [us] fees to carry out their financial activities”.

    The claim to being “accountable to the Treasury – which is responsible for the UK’s financial system – and Parliament” is also a bit of a (poor) joke. We only have to remind ourselves of the FCA’s perennially uncooperative and increasingly fractious relationship with the TSC for this to be readily apparent.

  15. “the independent tag seems now to have been reinstated with the words “we’re an independent body and we do not receive any funding from the Government” ”

    Julian; this IS, the past, present and future, (as they say) if the above is the case ? what “rights” does the treasury have demand money from the FCA ?

    It all sounds like one way traffic; from a Regulatory and Treasury point; we wont pay YOU anything, but we reserve the right to take what we like from YOU

    A heads I win, tails you lose, scenario !

  16. Julian Stevens 15th June 2015 at 3:27 pm

    DH ~ Good point. Were the FCA genuinely independent from the Treasury it could simply refuse to hand over any fine money. Obviously some pretty powerful levers were pulled and Martin Wheatley was told This is what you’re going to do and if you don’t you’ll be out on your ear so fast that your feet won’t touch the ground.

    Had the proposal been put forward by Andrew Tyrie, chairman of the TSC, we may be pretty sure that Martin Wheatley would have told him to go jump in the lake (and got away with it). This in turn suggests that Andrew Tyrie’s position is, in reality, not very important at all. The real power barons operate from behind closed doors.

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