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