17 April 2013
Business Crime Trainee Solicitor James Medhurst on FCA fines to be paid to the Treasury
One of the changes in the Financial Services Act, 2012 (in force from 1st April 2013), sees fines levied by the Financial Conduct Authority being paid directly to the Treasury, rather than being used to reduce the fees of those bodies regulated by the FCA, as had been the case previously.
The FCA will only be allowed to keep those funds needed to pay for its enforcement costs. This change will apply retrospectively so that the Treasury will also receive the fines paid to the Financial Services Authority since April 2012, which are likely to amount to more than £300 million.
In announcing the new policy, the Chancellor George Osborne said, “Under the previous Government’s regime fines paid to the FSA are used to reduce the annual levy other financial institutions are asked to pay. I am far from convinced that in all cases this is the best use of the money.” This was done in response to a suggestion by the consumer group Which? who said that the money raised could be used for schemes that will benefit consumers, such as financial education.
The government has pledged £35 million from the funds raised to support members of the armed forces but it has made no commitment as to how the rest of the money will be spent. As some critics have noted, there is a risk of it being used to generate revenue for a cash-strapped government and this could itself affect the approach that lawmakers take to financial regulation. As Mark Nayler of Spear’s magazine writes of the fines, “The danger of handing the money they raise to the Treasury rather than an independent regulator is that the government might be less inclined to look at other ways of addressing the City’s misdemeanours.”
It seems unlikely that the consumers of financial services will directly benefit from the changes which may even be detrimental to consumers in the long run. Independent financial advisors who receive no commission for the sale of financial products will be particularly hit by the rise in fees and this will make it more difficult for them to do business, reducing choice for consumers.
The Association of Independent Financial Advisers has been a leading critic of the changes. Its chairman, Lord Deben, wrote to George Osborne last July, suggesting that the money be put towards funding the Financial Services Compensation Scheme, which is used to cover the losses of consumers who have claims against insolvent financial services firms. However, this will do little to benefit consumers in practice as the FSCS is currently funded in the same way as the FCA, through fees from regulated firms, and so this proposal would not be substantially different from the previous regime.
There is a sense that an opportunity has been missed here. While the imposition of fines is an important part of regulating the financial sector, it is also necessary to provide incentives to the firms that do comply with the regime and to provide protection to consumers. If reducing FSA fees was not the best way to address these two important goals, some of the revenue raised by its abolition could have been used to find a more effective alternative.
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