Neil Liversidge: Time to tackle the cost of regulation


Nic Cicutti recently argued against fines being used to reduce regulatory costs to firms. Such was formerly the case under wicked old Labour.

Fortunately that nice Mr Osborne righted that particular wrong. How blessed we are to have a Chancellor from a party that understands business. Since then the Government has pretty much grabbed the lot. Thanks George. My cheque for Tory party membership is in the post – not.

Nic argues fines should fund financial education and debt advice. He challenges Apfa to get behind his idea which he says will “demonstrate [Apfa’s] pro-consumer and lobbying credentials”.

His argument however completely and conveniently ignores the fact that in every business the customer ultimately pays for everything. It also ignores the iniquity in the weird but (for the government) convenient regulatory pick-and-mix hybrid which is UK financial services regulation. In this system, while receipts from fines are nationalised, the costs are completely privatised. Come what may, firms pay.

Nic posits that “fines and compensation costs are a ‘negative incentive’ for the rest of the industry to clean up its act.” So how does that work for the vast majority of firms whose act is clean to start with?

In recent years I’ve written ever larger cheques to the FSCS to compensate victims of firms who did things I would not do in a million years. Not because my act was less than pristine but because regulation failed.

In 2010 another journal ran a front page story on how I’d reported an ‘adviser’ who was running his own mini-Madoff scheme and how for a year the regulator had done nothing. Only then did the enforcement sloth crawl slowly down from its tree. We’d have paid for that one too. Why? Because while fines are nationalised the risks of regulatory failure like its costs are firmly privatised.

Those with long memories will recall how in 2004 Legal & General challenged the FSA over a £1.1m fine it sought to impose on L&G for alleged mortgage endowments misselling. After a six-week hearing the FSA could only prove misselling in eight cases, leading the tribunal to rule it had been wrong to allege these indicated a wider problem with L&G’s sales processes.

Did firms have anything to cheer about when the regulator got this slap? Not really, because we paid the legal costs anyway.

Now the FCA looks like embroiling us in ruinously expensive litigation with Keydata’s Stewart Ford. The one certain outcome is that whether it’s win lose or draw for the FCA v Ford, regulated firms are guaranteed losers who are certain to pick up at least one lot of costs. On the other side of the equation it’s reported that Stewart Ford intends suing the FCA for £750m. That should make for a nice big top-up levy if he wins.

There is a simple moral answer to the fines question. It should be determined by the nature of regulation itself which should be either wholly privatised and self financing or wholly nationalised with risks underwritten by general taxation.

If it is to be private then all fines should be recycled to fund all costs including the FSCS. A no-claims-bonus type system could easily be developed to reward good firms and penalise the less good – Nic’s ‘negative incentive’ made fair and workable.

If it is to be nationalised then firms should pay levies for regulatory oversight only. Fines should go to fund the FSCS with any shortfall being made good from general taxation. Legal costs should likewise be met by government which should keep any damages obtained.

In that way it would be held properly accountable for regulatory failures including reckless and unwise litigation. And only when we get that level of accountability will we get diligent, workable and fair regulation.

Neil Liversidge is managing director of West Riding Personal Financial Solutions