Financial regulators' funding requirements highlight "proactive approach" to regulation, says expert

Conduct and compliance regulator the Financial Conduct Authority (FCA) is seeking £432.1 million from the sector, while the Prudential Regulation Authority will require £214.2m. The combined total is a 15% increase over the £559.8m cost to the industry of the single Financial Services Authority (FSA) in 2012/13. The FCA and the PRA replaced the FSA at the start of this month.

Monica Gogna, a financial services regulation expert with Pinsent Masons, the law firm behind Out-Law.com, said that the funding consultation published by the FCA showed that the new regulator planned to use the money to create a more "proactive approach" to regulation.

"This is reflected not just in the increase in fees for high-impact firms and medium-sized firms but also with the confirmation of the FCA's wish to increase the size of its front line supervision staff," she said. "The question will then be whether the FCA is successful in ensuring that its workforce is sufficiently able to understand and respond to the innovative nature of the markets and to fulfil its aim to protect the consumer."

"For firms, it is clear that the regulator is stepping up its efforts to closely monitor their activities both at the point of sale and product innovation. This inevitably will lead to an increase in internal costs for compliance and product development," she said.

The proposed annual funding requirement (AFR) for the FCA also includes fees charged on behalf of the Financial Ombudsman Service (FOS) and Money Advice Service (MAS). Part of both regulators' AFR is used to fund the Financial Services Compensation Scheme (FSCS).

In a statement published alongside its funding consultation, the FCA said that the increase in fees reflected the costs to both regulators of increased IT costs, central support services and an increase in front line supervision staff. Accommodation costs were also higher under the new regime since the PRA has moved to new premises within the Bank of England, it said. The FCA said that it would need to take on additional staff before 1 April 2014, when it takes over responsibility for the regulation of consumer credit from the Office of Fair Trading (OFT).

The FCA said that the fee increase would mainly affect the largest firms, "reflecting the resources applied to the intensive conduct and prudential supervision of high impact firms". The minimum fee, payable by 42% of firms regulated by the FCA, will remain at £1,000 while larger firms would see a "proportionate increase" reflecting the type of business they conduct, it said.

Any fines paid by the industry to the FSA in a given year were previously offset against the amount of the levy, reducing the amount payable by firms. However, since April last year regulators have only been allowed to retain enough to cover their enforcement costs while the remainder has been distributed to good causes by the Treasury. The amount collected by the FSA in 2012/13, less enforcement costs, was over £340m, according to the FCA.

"Our first year as a new regulator will be an exciting and challenging time but one for which we are well prepared," said FCA chief executive Martin Wheatley. "We are introducing new approaches to the way we do much of our work, becoming much more proactive and consumer focussed. Much of the increase in AFR is the result of the additional resources needed to ensure the FCA delivers on its new objectives, as well as the practical costs of implementing the new regulatory structure."

He added that the FCA recognised the "difficult economic circumstances for many firms" and was "committed to keeping any essential cost increases to a minimum".