FSA chief Hector Sants warns that the new regulator’s early-intervention approach will come at a price

The insurance industry’s key new watchdog could require an extra £200m per year in order to implement the government’s proposed early-intervention approach to financial services regulation.

Under the new, so-called ‘twin peaks’ model of regulation, the FSA is being replaced by two new regulators: the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). Last month’s draft white paper on financial regulation, which outlined the shape of the post-FSA regulatory regime, said that the conduct watchdog would be expected to step in when financial products are being developed.

This early-intervention approach is designed to nip in the bud issues like payment protection insurance, which the FSA has been accused of allowing to spiral out of control due to its pre-financial crisis “light touch” style of regulation.

The cost of intervention

But FSA chief executive Hector Sants said in a recent speech that the proposed approach would require the FCA to be equipped with more powers and increased running costs.

Sants said that, with many firms only visited once every four years, “there are [currently] undoubtedly a number of failings that the regulator has no chance of detecting in advance”.

He added: “A more interventionist regulator offers the prospects of greater success but comes with the certainty of extra cost.”

He predicted that annual inspections of the 24,000 firms currently visited only once every four years could add “at least another £200m to the cost base of the FCA”.

The ‘trade-off’

Sants, who is stepping away from involvement in conduct issues as he prepares to take on the chief executive’s role at the PRA, said society needed to debate what he described as the “trade-off” between greater regulatory effectiveness and cost.

He added that the FCA running costs could lead to reduced mis-selling and hence lower contributions to the Financial Services Compensation Scheme. The total budget of the FSA, which is funded by fees from the companies that it regulates, exceeded £500m for the first time this year.

“We need to take that into account when we are considering the cost of the FSCS. The £200m compares with the FSCS claims levied on smaller firms, excluding the cost of bank failures, of some £300m per annum for the three years to March 2012.”

Sants also acknowledged the ABI’s criticism that a more interventionist style of regulation could curb innovation.

Margaret Cole, who is leading the ‘shadow’ FCA within the FSA until its proposed chief executive Martin Wheatley takes over in the autumn, said the new regulator would appoint a new senior level team to analyse how financial markets work and interact with customers.

Fair fees advice

State your correct income

When declaring your income, make sure that you put the correct figure. This not only has the obvious benefit of ensuring that your own brokerage’s records are correct, it also keeps down the overall figure for the sector, which means that the FSA does not have an inflated idea of what brokers can afford to pay in terms of fees and levies.

Should I pass this cost on to my customers?

Some firms are attempting to pass fees and levies on to customers as they have become such a big cost. But fees split out in this way are unlikely to receive the normal exemption from VAT enjoyed by insurance contracts.

Join your colleagues, who have signed our petition in their hundreds at insurancetimes.co.uk/backfairfees

What's Biba doing?

While the FSCS has been Biba’s number one lobbying initiative over the past year, for some brokers the trade body hasn’t banged the drum quite hard enough over the issue. “Biba should be earning its corn,” writes DNS Insurance Services managing director Derick Thompson in his response backing Insurance Times’s Fair Fees campaign.

Biba has cultivated good relations with officials both in Whitehall and at the European Commission. However, the association has not tended to engage as strongly with politicians.

Last year’s trip to the Conservative annual conference in Birmingham was the first time that Biba had gone to the annual party conferences, for example.

Making itself heard

But this jaunt to the West Midlands represented the first step in a more concerted attempt to win over Westminster.

Acting on advice from political lobbyists Fleischmann Hilliard, Biba circulated a standard letter for brokers to send to their MPs to get them to put pressure on City minister Mark Hoban.

Recent months have seen a string of initiatives within Parliament to force some action from the government to get the FSA to speed up its review of the Financial Services Compensation Scheme. The initiatives – an all-party parliamentary group on insurance and financial services, an early-day motion by backbench Labour MP Alan Meale and a petition submitted to the House of Commons by Biba – all urge the powers-that-be to accelerate the review. But so far, this activity has borne little fruit.

Slow process

Biba head of compliance and training Steve White argues that Biba members need to understand how difficult it is to achieve change.

“You can’t force the FSA to do anything, it will do what it wants.”

Evans believes that Biba has done an effective job over the past few months. “Biba has kept the issue to the fore and kept parliamentarians informed about the challenges to the sector.

“It’s difficult to see what else they could be doing apart from taking over the FSA.”

You say ...

Clive Nathan, managing director, Towergate Underwriting

‘We are completely behind your campaign. We feel it’s completely unfair the way the sector is treated at the moment’


Ashwin Mistry, chairman, Brokerbility

‘Going forward, we will need to raise the bar, work ever more closely together as brokers and work out a co-ordinated strategy. We will not give up on what is clearly an unfair levy on the broking community’


Eric Galbraith, chief executive, Biba

‘The campaign has helped to raise the issue within the press and the industry. However, it is still important for the pressure to continue for an urgent review to avoid further cost increases for brokers’