FSA chief executive Hector Sants has warned that even if the Financial Conduct Authority was to invest significantly more in supervision it was unlikely the Financial Services Compensation Scheme levy would fall by a similar margin.
Speaking at an FSA conference on the Financial Conduct Authority this morning, Sants said there was a straightforward trade-off that needed to be made between cost and effectiveness.
He argued that while the move to a more interventionist style of regulation offered prospects of greater regulatory success, it would also certainly bring extra cost.
He said that currently many firms are only visited once every four years, which means certain firm failings will go undetected by the regulator.
Sants said: “The trade off is between the resultant inevitable periodic call on the FSCS levy versus the extra cost of employing a permanent group of inspectors.
“For our 24,000 firms who do not have relationship managers, if we move to an annual inspection this could add at least another £200m to the cost base of the FCA. We need to take that into account when we are considering the cost of the FSCS.”
He explained the £200m of annual supervisory costs has to be set against the £300m a year cost of FSCS claims levied on smaller firms.
The £300m figure represents the total amount of FSCS claims levied on smaller firms per year for the three years to March 2012 and includes the cost of the failure of Keydata.
Sants said: “The question is: if we invested an additional £200m a year into supervision, how much would the FSCS levy fall by? I suspect not by £200m.”
He also warned that the FCA’s approach of early intervention could reduce innovation, reduce choice, reduce competition, and would certainly raise the cost of regulation.
Sants added: “I hope I have laid out starkly the benefits and risks of a more interventionist regulatory stance, and I invite society to decide whether this is a bargain it wishes to strike.”