New regulatory fees to be based on income rather than approved employee numbers, says FSA

This year's fees policy consultation paper from the regulator also considers how its fee structure will change to fund new regulatory bodies the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). It is the FSA's expectation that next year's consultation will be carried out by the new regulators, who will publish their proposals together with their business plans in April.

According to the consultation, although most of the provisions in the FSA's existing Fees Manual will be carried over to the new regulators when they acquire their legal powers, some "substantive changes" will be required. These include the introduction of separate fee-blocks, or categories of activity, for PRA-regulated firms, revised fee discounts for firms based within the European Economic Area (EEA) that undertake regulated activities through a branch 'passported' into the UK and the basis for which the new regulators will be able to levy "restructuring special project fees".

The draft Financial Services Bill, which is currently before Parliament, will see the FSA's existing functions taken on by two new regulatory bodies. The PRA, part of the Bank of England, will handle most of the day-to-day regulation and supervision of "systemically important" banks, building societies and insurers, while the FCA will handle conduct and compliance issues.

A survey of senior compliance officers by consulting firm Proviti in August indicated that firms expected their regulatory compliance costs to rise by as much as 20% following the split.

The FSA proposed changing its method of calculating firms' annual contributions to be based on their income rather than the number of approved persons working in the firm last October. From next year, the income threshold under which firms will only have to pay the minimum annual fee will be set at £100,000. Income above this level would be subject to additional fees. The new rules will affect advisers, dealers, brokers and corporate advisers who hold and do not hold client money that fall under FSA fee blocks A12, A13 and A14.

The FSA said that the threshold was "appropriate" as it would leave a similar proportion of firms paying the minimum fee as under the current system. Currently, firms that employ two authorised persons or fewer pay the minimum fee.

"Setting the minimum fee threshold at £100,000 preserves the overall proportion of firms paying minimum fees only and keeps most of the existing firms under the threshold," the consultation paper said. "Some firms will undoubtedly see some sharp increases in fees but, while no doubt unwelcome, they should be affordable in relation to the income generated by the activity."

According to an impact analysis carried out by the regulator, the proportion of firms paying the minimum fee under the new structure would go from between 35% and 43% to between 38% and 46%. Firms with lower than average incomes per approved person will likely see their fees fall, while those where income per approved person is higher than average will likely see increases.