Each year, the FSA publishes both fees policy and actual fees consultation papers. The consultation on fees policy is published in the latter half of the year and typically considers the policy theory behind fees. This paper was published in October.
The consultation on the FSA’s plan and budget and the costs to firms typically comes out in February.
The FSA’s latest consultation acknowledges Aifa’s work relating to fees, including agreement that risk-based cost allocation does indeed hold merit. The paper also acknowl-edges the need for the FSA to be more transparent in its approach and this is welcome.
However, the broad thrust of the FSA’s argument at present is that while Aifa’s ideas may hold merit, the current direct cost allocation method works well, is trans-parent and minimises cross-subsidy, at this point I am concerned that the FSA has consulted on and provided evidence which I feel is directly to the contrary.
The consultation proposes merging the A12 and A13 fee classes and adding a new “client money and assets” fee class to those with such exposure. The concern that Aifa has with the proposals is that we are not comparing two like for like businesses.
First, of the 100,000 or so advisers within the two fee blocks, less than half fall into the IFA/stockbroking scope. This seems like a very broad group, considering the FSA believes that cross-subsidisation is undesirable.
Second, the FSA is adamant that it also bills back the cost of regulation to those firms that create the work. This is the underlying principle of a direct-cost allocation. Direct-cost allocation only works if you accurately allocate costs.
The FSA is explicit that this must include a minimisation of cross-subsidy. But if you took the cost of the FSA and divided it among all fee-payers equally, IFAs would be subsidising Basel III while Lloyds members would be subsidising the RDR.
This is where I have a fund-amental problem with the FSA’s current fees consul-tation. The FSA insists that the cost of regulation is currently being directly billed back to firms. Firms in A12 currently pay an additional risk prem-ium because they are holding clients’ money. However, this cost is less than for firms in A13. Therefore, the cost of regulating these two groups must be different if the FSA is doing as it states and charging firms according to the cost of regulating them.
The alternative, of course, is that the FSA does not curr-ently allocate the cost of regul-ation to these classes accurately.
Assuming that the FSA does believe costs are correctly allocated to fee blocks, the only conclusion we are left with is that the FSA wants to introduce an element of cross-subsidisation within the new combined A12/13 class.
It is time for the FSA and then the Consumer Protection and Markets Authority engage the wider industry in a discussion on how costs are allocated. I simply do not believe that risk-based fees are “too difficult” for a regulator of 3,500 people.
Andrew Strange is director of policy at Aifa