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IFAs and their clients should not pay for Osborne’s U-turns

Chancellor George Osborne’s decision to funnel the proceeds of fines to the public purse rather than back to the industry may be a popular decision with voters but caution should be exercised.

Osborne this week confirmed to Parliament that he intends to legislate so any fines from April onwards, including the recent £59.5m Barclays fine, will be paid to the exchequer rather than being used to reduce future industry FSA costs.

At present, the fee block housing the offending firm pays for any enforcement work which has led to the fine. The proceeds of the fine are first used to refund the fee block for the cost of this work, with any extra funds distributed across all FSA fee blocks to reduce future regulatory costs.

Therefore, IFAs have plenty to lose from this move, which has been triggered by unacceptable behaviour from the banks.

FSA figures show the fee block affecting most IFAs would have been 21.7 per cent higher for 2012/13 without the impact of the fine redistribution.

Policymakers need to keep in mind that the proceeds of fines are not just used to subsidise the banks but also to reduce the huge and increasing regulatory costs suffered by IFA firms. These are likely to be passed on to their clients in extra charges.

At a press conference this week, Money Marketing asked FSA chairman Lord Turner for reassurances that smaller firms would be ringfenced from the impact of large fee hikes as a result of Osborne’s plans but he would not offer any. Turner pointed out that FSA fees for smaller firms had been frozen for three years but this does not take account of huge FSCS costs, which are unlikely to reduce in the near future, and costs associated with paying for the Money Advice Service.

Osborne could easily look to amend the rules to ensure the polluter does not profit from fine rebates without increasing costs for the customers of all financial services firms. Another option would be to divert the fine money to pay for the MAS.

Using FSA fine money to fund consumer financial education and engagement could be the right signal to send as the Government looks to reform banking culture, assuming the MAS can get its house in order with a new chief exec. Of course, these routes are less likely to conveniently fill holes in the Treasury budget caused by a raft of recent U-turns.

At a time when too few people are engaging with financial services, increasing further the regulatory costs for decent firms and their clients in exchange for a bit of political opportunism and to paper over embarrassing Budget errors would be a huge error of judgement from the Chancellor.

Paul McMillan is editor of Money Marketing- follow him on twitter here


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There are 13 comments at the moment, we would love to hear your opinion too.

  1. The whole system is a joke in any event. If a small firm is fined the principals ends up paying and often end up out of business. There is direct personal accountability.

    With the banks the firms are fined. The numbers are hugs which sounds good on TV – right up until the customers work out that the directors/ others screw up and the customers pay the fines.

    If you want to make the city more accountable fine the directors and traders PERSONALLY and ban corporate subsidy. If the players could loose their shirts for cutting corners (absent the occassional blatant fraudster) general bad practice would end overnight.

  2. This industry is going to the dogs because of the attitude of regulators and government. They need to open their eyes and wise up.

  3. Isn’t this a form of taxation without representation. Perhaps IFAs should change their names to Vodaphone, and ask the top man at HMRC to adjudicate on this.

  4. To be quite frank about Osbourne’s decision I am not surprised with his actions! He does not have a clue about how to reform the banking sector nor does he have a clue with regards to Financial Services!
    Our industry (which i have had the pleasure of being part of for more than 20 years) is going to the wall!!!
    The government is full of wind & the smell just get’s worse.

  5. What with this, NEST and RDR. The government and its predecessor seem out to destroy the UK financial services industry that earns so much for this country. I’m getting out now !!!

  6. Harvey Knight 5th July 2012 at 1:22 pm

    This proposal raises serious concerns about the fairness and accountability of the FSA Enforcement process that results in an financial institution and/or individuals been fined by the FSA. We have already seen proposals to reduce the powers of the Upper Tribunal to direct the FSA to stand down and the promotion of the former Chairman of the FSA’s decision making body to the Upper Tribunal as a judge. Now that the State is seeking a cut of any fines the FSA imposes, it really begs the questions who is policing the FSA and how are FSA regulated persons going to receive any justice? And should FSA Enforcement be seen as an offshoot of the Inland Revenue?

  7. This action clearly illustrates the difficulty faced by politicians – they are unable to distinguish between public funds and private funds. Brown raided the pension funds for Labour and Osborne is about to emark on a similar raid.

    It is naive to think that he is doing this on behalf of the taxpayer.

  8. Simon Websters comments earlier are spot on -the large institutions ARE important to keep on the right side of the government , whilst the smaller businesses get hammered are of no significance at all. Individuals suffer , whilst large organisations gte fined which are passed on to the consumer – democratic country – NO WAY !!!!

  9. The FSA require us to agree our fees in advance with a client. However we chose to do that we are unable to retrospectively adjust them upwards.
    I find it hard to square this with their attitude of landing us with levies that bear no relation to their own fees calculator & now redirecting the Banking fine windfalls to the Treasury’s coffers.
    I get the feeling that I (& therefore my clients) are being viewed as a cash cow. I may well lose some clients when I tell them that my fees are going up to pay for all this.
    Yet I am concerned of putting my servicing fees up because in its recent document on trail commission the FSA say they will be monitoring the position post RDR to see if annual adviser fees go down or stay the same. Note, there is no mention of them going up which leaves the reader to conclude that this is a veiled thread that if fees do no go down they will consider this a failing and take further action.

  10. It’s all a Farce!!!!
    Barclays gets fined £59m by FSA, the funds do not go towards paying for the FSA but are stolen by Government and even worse, the main perpertrator – Diamond, gets a golden goodbye of approx £30m. Obviously the fine is just a paltry sum if the Diamond severance is 60% of the fine.
    Justice – not in our police state.

  11. Julian Stevens 5th July 2012 at 10:04 pm

    So not only will any degree of cross-subsidy between good firms and regulatory offenders be removed, but the FSA won’t even be able to recoup the costs of its investigations leading to the fines themselves. The rest of us will be forced to pay these costs ~ a double whammy. Before much longer, the FSA/FCA will be costing the industry a billion pounds a year.

    Elsewhere, Adair Turner is reported as endorsing this double kick in the teeth.

  12. Peter Davies @ Create Wealth Management 6th July 2012 at 10:58 am

    IFA’s being hit again – we contribute towards to FSA’s running costs and the FSA have been spending considerable resource on supervising the banks, which you would only think will increase. At least part of the fines should come to the FSA to cover the costs involved of the irregularities. Sadly it wont, the money is easy pickings for the government; which means that any increases in their budget will have a direct impact on us. We are in the wrong industry.

  13. It is so typical of Turner to applaud the grab of fines by the Treasury. Thank goodness we are getting rid of this man. A lifetime Consultant on everything and a creator of nothing.

    As I have banged on before (many times). It would be nice if we had a really definitive account of the amount of fees levied and exactly how they have been apportioned in the past to reduce our fees. I wonder if it just adds a spur to the regulator to keep increasing the cost of regulation?

    It doesn’t take an actuary to work out a fair way for these fines to be apportioned. First a transparent (a first for the Regulator!) accounting of the fee receipts. Then any firm who has been fined is disbarred from the rebate scheme. For the others they then receive a rebate from the pool pro rata the fees they have paid. It ain’t hard, it just takes the will.

    To calmly just hand over the dosh to the treasury is nonsense. If anyone thinks that the taxpayer will benefit one scintilla they need treatment. Like all other payments to this and other Governments the money gets swallowed in the maw and is invariably squandered or wasted.

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