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Extra supervision will not significantly reduce FSCS costs

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.”

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Increased supervision of 24,000 small firms will not reduce the FSCS levy because in the main it is not the 24,000 small firms that are causing the big problems.

    If you use resources to supervise them more closely, most of those resources will be wasted looking at firms that are doing the right thing anyway.

    If you increase the cost of regulation you will put more of those small firms that are doing the right thing already out of business.

    There is a fair chance that the extra supervision will actually increase the FSCS levy as small firms go out of business and their clients go to the larger firms and banks that have caused most of the problems.

    Can the regulators not see the problems they are creating for consumers?

  2. Does it really cost £8333 to visit a firm? We seem to be working in OPM* terms again Hector.

    If the inspectors were paid £50,000 a year + car and pension and saw five firms a week, I reckon in the real world you could do one visit a year for about £7.5m. I’ve allowed for holidays and office costs.

    *Other Peoples Money – this is a currency with which you can purchase goods and services without any cost to yourself. The FSA has stacks of OPM.

  3. Lindsay Lockett 28th June 2011 at 4:19 pm

    Rather than move to 12 month inspections to all, why not move to every 2 – 3 years, with mandatory 12 months inspection for all who receive complaints within last 12 months. After all as I’m QCF4 qualifies surely my advice is beyond doubt, Mr Sants 😉

    It also seems that Mr Sants is saying that with all this extra effort/cost he is still far from sure it will deliver lower complaints/FSCS costs.

    Why don’t FSA fee relate in some way to complaints received, the industry therefore has an incentive to comply and the FSA is paid to investigate those who dont.

  4. Exasperated but not surprised 28th June 2011 at 10:34 pm

    An admission that they are going down the wrong path, setting out to achieve little, if anything, for the consumer – except pile more costs ultimately on them. It’s all getting like the arrogance and dogmatic self asserted empire building of a 50’s communist state like – look what happened to that regulatory model……

  5. “The Regulators’ Compliance Code is a central part of the Government’s better regulation agenda. Its aim is to embed a risk-based, proportionate and targeted approach to regulatory inspection and enforcement among the regulators it applies to. Our expectation is that as regulators integrate the Code’s standards into their regulatory culture and processes, they will become more efficient and effective in their work. They will
    be able to use their resources in a way that gets the most value out of the effort that they make, whilst delivering significant benefits to low risk and compliant businesses through better-focused inspection activity, increased use of advice for businesses, and lower
    compliance costs.”

    Have you read the Code, Mr Sants?

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