The Financial Services Authority (FSA) has published its business plan setting out its priorities for 2011/12, and the implications for the FSA’s budget.
The document outlines the FSA’s priorities and specific initiatives for the year ahead, which reflect the continuing challenges facing the financial services industry.
This year’s business plan has been created against a backdrop of considerable change, with the UK government last year announcing plans for changes to the structure of financial services regulation in the UK. The FSA will restructure into the Prudential Regulation Authority (PRA) and the existing FSA legal entity will become the Financial Conduct Authority (FCA). This change will occur at the end of 2012 or early 2013. Until then the FSA will continue to deliver on its statutory objectives and implement the major initiatives that are already underway. The key areas will include:
- Maintaining ongoing supervision in a period of continued fragility in markets.
- Continuing to influence the international and European policy forums, delivering, in particular, the new prudential regulatory agenda.
- Implementing the current EU major policy initiatives, including Solvency II.
- Delivering on the principal national sector initiatives to improve consumer protection: the Retail Distribution Review (RDR) and Mortgage Market Review (MMR).
- Continuing to improve the FSA’s operating systems and the quality of its staff.
- Implementing the government’s regulatory reform agenda.
Reflecting the extensive resources needed for the regulatory reform programme and the need to recognise the difficult economic circumstances for many firms, the FSA is not planning any new discretionary initiatives and is capping headcount at the current level.
The majority of the FSA’s resources are utilised providing ongoing supervision. The two biggest policy initiatives are Solvency II and influencing the substantial international prudential reform agenda, especially in respect of Basel III.
The FSA continues to implement key areas of the substantial international regulatory reform agenda particularly in respect of the banking agenda set by the Basel Committee and ensuring that the wider policy agenda primarily mandated by the European Union is delivered. Influencing that agenda remains vitally important, particularly given the increased role of the European-level institutions and the reality that these authorities will play an increasing role in setting the rules within which firms have to operate and which the future UK authorities will have to enforce.
The FSA will continue with its consumer protection strategy, launched in March 2010, which seeks to actively anticipate consumer detriment and stop it before it occurs. The two principal initiatives within the consumer protection strategy are the structural reform of the investment market through the Retail Distribution Review project (RDR) and the Mortgage Market Review (MMR).
In respect of the RDR, the project is on track to ensure the intended principal changes with regard to adviser remuneration commission structure and training and qualifications are introduced from 1 January 2013. The FSA nevertheless remains conscious of the need to work with the industry to ensure that the changes occur in as smooth a manner as possible and to this end the FSA has set up a workstream looking at what support industry needs. In particular, the FSA will continue to assist industry in its development of a simplified advice service.
In respect of the MMR, in 2011, the FSA will continue to consult and analyse the impact of its proposals. In the summer the FSA will publish an indicative cost benefit and impact analysis of a full package of proposed rules, and follow this up with its final package of rule changes in early 2012. In reaching its conclusions, the FSA will seek the right balance between protection for consumers, sustainability of the market and consumer choice.
The FSA is particularly conscious of the need not to take a “one size fits all” approach and the importance of balancing the advantages of simplicity against those of flexibility. For example, the FSA acknowledges that its initial proposal to have a fixed 25 year term for assessing affordability, whilst easy to administer, may not be appropriate given the range of different individual circumstances. The FSA nevertheless remains focused on ensuring that the new regime includes a robust assessment by the lender of the affordability of the loan for the individual, both for interest only and repayment loans. It is not the FSA’s intention to ban interest only loans which undoubtedly for some consumers represent an appropriate method of finance.
Hector Sants, FSA chief executive, said:
'The 2011/12 business year for the FSA will be a difficult one. We have to ensure that we are operating effectively as a supervisor as well as taking forward the key policy initiatives. The principal ones are progressing the domestic consumer protection strategy, implementing a number of key EU directives and influencing the continuing international regulatory reform agenda. All this has to be done at the same time as taking forward the preparations for a new regulatory structure. The regulatory reform agenda remains on track to ensure the new structure will be ready in 2012. We will be seeking to deliver this agenda with a capped headcount'.
The Annual Funding Requirement (AFR) for 2011/12 is £500.5m, up from £454.7m in 2010/11, a gross increase of 10.1% in overall funding. The increase will be borne by larger firms, reflecting the recently increased resources applied to intensive supervision of high impact firms. However, the enforcement fines the FSA imposes during the previous year are returned to the industry by way of discounts to their fees in the following year. This means that in total firms will pay 2% less than last year.