FSA Announces Doubling of Fees for Investment Banks

From Karl Hindle:

The FSA is increasing the amount of money raised from the industry to £435.5m – a hike of 35.8%.
This represents a doubling of regulatory fees for the largest retail and investment banks and for several, the increases are higher than this – both HSBC and Lloyds Banking Group have been hit with higher increases and the largest UK deposit takers now have a bill in excess of £22m.

The increases have been created by a number of UK based issues.

The FSA has been under severe pressure from smaller retail outfits and IFA advisers to reduce the cost burden upon them but how much pressure the smaller, retail based sector can exert in practice is highly debatable. Clearly, the greatest pressure has come from criticism of the FSA in the wake of the Northern Rock failure.

Justified or not, the FSA has been singled out as the primary culprit in the failure to spot and head-off the collapse of Northern Rock and for its handling of the Royal Bank of Scotland rescue effort and numerous other banks and financial institutions. With the global economic situation costing the UK taxpayer in excess of £40bn in bail-outs to ailing financial institutions reeling under the pressure, the FSA is under increasing scrutiny when it comes to delivering upon its principal objectives; investor protection.

While investor protection may be the primary objective, the fee hikes smack of the politicization of the regulatory issues associated with failed or weakened institutions causing embarrassment for the British government and loss of confidence overseas in London as a financial centre.

The increases in the fees have been directed firmly at where the FSA believes the most regulation is required. As the FSA said, "We have been careful to ensure, as far as possible, that the largest firms in the areas that require the most regulatory work will pay the most". While the industry itself has been split over how the increases in FSA funding should be raised, the focus on increasing regulatory fees on the major players is a clear indication that the FSA believes they are where the regulatory effort must be concentrated in the short- to medium-term.

The overall increase in the FSA budget has led to a recruitment drive with another 280 compliance supervisors being hired to cope with the increased workload. Larger firms and institutions can expect a much higher compliance presence from the FSA in the forthcoming year and no doubt, we can expect announcements to follow shortly thereafter of hefty fines and penalties being levied upon the unfortunate, compliantly backward or miscreants depending on your point of view.

The question should be asked; whether the increase in compliance input from the FSA is going to achieve its stated regulatory objectives or whether the fee hikes and increased activity are simply a knee-jerk reaction to some very strong criticism?

As with all things, only time will tell.