Anyone leafing through the archives of the financial trade press is certain to find one recurring theme: a continuous focus on the heavy cost of regulation.
Without fail, every year throws up a slew of headlines on the subject in Money Marketing and elsewhere, with plenty of stories bemoaning the regulatory burden that advisers have to face.
T’was ever thus: a survey of 3,000 small firms more than 10 years ago by the FSA’s Practitioner Panel, which also appeared in Money Marketing, found that “the cost of compliance is the single biggest issue.”
What is relatively new – or at least seems to be an issue that has cropped up only in the past year or two – is the question of what should happen to the money raised from fines levied by the FCA of miscreant firms that have fallen foul of the regulator.
Last week Money Marketing ran a detailed article in which it queried how this money was being used.
There appear to be two strands to the MM story. The first is about accountability: since April 2012 the FCA appears to have raised close to £3bn in fines. Its own website shows more than £800m has been raised in fines during 2015 alone.
The change to how this money was to be used was unveiled by Chancellor George Osborne in 2012, shortly after the first massive Libor-related fine imposed on Barclays. Until then, the FSA had generally raised a few tens of millions through fines, relative chicken feed compared with today.
However, in a neat piece of party politics, the Chancellor told MPs: “Under the previous government’s regime, fines paid to the FSA are used to reduce the annual levy other financial institutions are asked to pay. I am far from convinced that this is the best use of the money.”
Instead, the Financial Services Bill that became law in December 2012 required all FCA fines from April that year, minus enforcement costs, to be passed on to the Treasury.
Where is all this money going? In the aftermath of the Bill, there was a small drip feed of media-friendly announcements telling us where some of that money was being used. More recently, the silence has been deafening.
The Treasury says some money has been spent on specific areas, for example, £1bn of fines related to forex manipulation has been spent on the NHS, or so we are asked to believe. But MM’s research suggests that apart from this, up to another billion is unaccounted for.
Back in January 2013, shortly after the Bill became law, a Treasury spokesman was quoted as saying: “There may be more announcements in the future about how the money from FSA fines is spent, but there is no firm commitment from the Exchequer to do so.”
And that is how the Treasury wants it to be, despite a growing chorus of calls for more clarity by range of individuals and organisations.
Last year, the Financial Times’ influential columnist Gillian Tett argued: “At the very least, there needs to be more public debate about how this punishment pot will actually be used; after all, one lesson from the financial crisis is that opacity has a nasty habit of breeding abuse.” She is completely right.
Once we do know where it is going, the second, more difficult strand of the discussion is that of what to do with the loot. Some advisers are calling for the money to be recycled back into “our sector”, for example to reduce the impact on regulatory fees or to “solve the Financial Services Compensation Scheme problem”.
I have no sympathy whatsoever for fines money to be used to ease the regulatory burden. It seems to me, as some of last week’s columnists also pointed out, that for the industry to be seen to gain out of this windfall would be exceptionally bad PR. Plus, by their nature the annual fines involved might fluctuate so significantly that financial firms would find it impossible to budget effectively.
Using the money to help the FSCS has more logic to it. And I rather like Apfa director general Chris Hannant’s idea of the FSCS levy continuing as now, with some of this fines money being kept and used to offset higher claims years.
But even here, my underlying view has always been that fines and compensation costs are a “negative incentive” for the rest of the industry to clean up its act. This applies to the FSCS levy too.
My personal preference would be for the money to be locked into a trust fund and to disburse annual grants towards a combination of financial education and debt advice.
These too are areas that advisers and the industry has been roped in to help fund, so they would see some small benefits. Better-educated and informed consumers would also indirectly benefit the industry.
The central issue, however, is that of accountability and openness. We need a proper campaign with support from consumer groups and MPs from all parties to both open the books and initiate a public debate on how that money should be spent. This should be done while trying to lay no claim to it on behalf of the industry. It seems like the perfect job for a trade association keen to demonstrate its pro-consumer and lobbying credentials.
How about it Apfa?
Nic Cicutti can be contacted at firstname.lastname@example.org