4th April 2011

"You’ve got to pick a pocket or two"

Fees 'to soar' as FSA fines estimated to reach £300m?

“In this life, one thing counts

In the bank, large amounts

I'm afraid these don't grow on trees,

You've got to pick-a-pocket or two”

Bad news for the bad boys and rightly so. FT Adviser reports that Simon Orton, partner for the law firm Freshfields Bruckhaus Deringer, has raised fresh concerns that fines imposed by the FSA could triple to around £300m a year with the introduction of its tougher rules.

Already in 2011, the FSA has levied fines of some £13.9m and in the tax year 2010/11 some £98.4m and three times higher than in 2009/10.

Great news everyone else though, behind every cloud is a silver lining in the form of Hector Sants, commenting in February: “We are very mindful of minimising the additional cost to firms and are pleased that net of enforcement fines, the actual amount we will be billing firms will be falling by 2%.”

I guess that this particular bit of “math” does not apply to the fined firm.

Fines are based on turnover amongst other factors such as seriousness, co-operation etc. In the case of small IFA firms this can be catastrophic, larger firms maybe not so much. For institutions the fine is perhaps not the issue, it is the damage to reputation.

In any event, the increasing size and volume of fines are being seen in many quarters as an alternative revenue stream, another way of covering the ever-increasing costs of a regulator in a habit of regularly overspending.

Is this right? Should fines go to the Treasury and not be treated as an alternative revenue stream by the regulator? One could argue that if the 2010/11 tax year fine figure of £98.4m is producing a fee reduction of 2%, where is the money going?

The FSA 2010/11 Business Plan is an interesting document, it lay’s out the costs of regulation at some £490.9m, up 18.3 % on the 2009/10 figure of £415m.

The total amount required to fund their budgeted costs for 2010/11, is £454.7m, an increase of 9.9% on the equivalent AFR of £413.8m for 2009/10. So if fines total £98.4m- 21.6% of the amount required to fund the increased costs in the 2010/11 plan, how is it that the reduction to fees is just 2%?

Is the suggestion that fines may increase in 2011/12 to £300m going to result in the fines maybe representing 60% or more of budgeted costs?

And then the disaster theory, what will happen if nobody is fined, the loss of revenue would be catastrophic for the FSA but then if everyone is a “good boy” the regulator will have done it’s job and not need so many staff- the biggest single cost in the 2010/11 budget at £346.9m.

One thing is sure though going forward in 2011/12, the budget will no doubt be overspent as usual and the FSA will have to raise the fees again, taking a tip from Bill Sikes-

“He can whip what he likes.

I recall, he started small

He had to pick-a-pocket or two”.

FSA/FCA, Panacea Comment