House of Commons - Explanatory Note
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35.     Thus there would be a saving in incremental compliance costs of around £11 million per annum, partly offset by a one-off compliance cost of £22 million. As noted earlier, the FSA's one-off transitional cost is estimated to be approximately £15 million. For simplicity, in order to convert all these amounts to equivalent lump sums at the present time (1999/2000), it can be assumed that the one-off compliance cost would arise in year 2000/01, that the compliance cost savings would start in the same year and that the FSA's one-off transitional cost arose in 1998/99. On these assumptions - even ignoring the FSA's expected savings in direct costs from greater efficiency - if the savings in incremental compliance costs for the next 10 years are discounted to the present day at a real rate of interest of 6% per annum, the combined effect of the recurrent savings and the one-off costs is equivalent to a lump sum saving of £44 million. Each £1 million per annum saving in the FSA?s direct costs would be equivalent to a further lump sum saving of £8 million.

36.     In order to reach a complete assessment of total costs, it would be necessary to reduce these expected benefits to reflect the approximately £4 million per annum cost of the Financial Services and Markets Tribunal and free legal assistance (see "Other costs" above). However, the provisions relating to the Tribunal and legal assistance, while resulting in some costs, offer substantial benefits in terms of fairness and access to redress in line with the better regulation principle of accountability, and can be justified on these grounds. Discounting these costs at a real rate of interest of 6%, provides an equivalent lump sum cost of £29 million. When combined with the discounted costs and benefits from expected changes in direct regulatory costs and compliance costs, the overall lump sum benefit is estimated at £15 million.

37.     This estimate does not include any benefits arising from the increased flexibility in relation to collective investment schemes or investment exchanges and clearing houses. For the reasons described above, it does not include an estimate of expected costs for firms formerly authorised by professional bodies or an estimate of costs arising from the FSA's additional responsibilities in relation to Lloyd's. In addition, it does not include any estimate of any possible reduction in fees charged by the FSA due to FSA income from fines being remitted to regulated firms. Such income is difficult to estimate, and will have no overall impact on costs (being, in effect, a transfer from bad firms to good).

Results of consultations

38.     The draft Financial Services and Markets Bill was published for consultation in July 1998, together with a draft RIA. Several consultation responses raised concerns about potential cost increases under the draft Bill, some of which related to potential actions by the FSA, rather than the primary legislation itself. The Better Regulation Task Force recommended that the RIA include an estimate of overall effect of the new legislation on costs. The assumptions as to likely costs and benefits for regulated firms and others made in the draft RIA were not generally challenged in consultation. As mentioned in paragraph 18 above the FSA itself will have to publish CBA on proposed and actual rules and will be accountable to the regulated community as well as Ministers and Parliament.

Summary and Recommendation

39.     The proposals in this Bill should lead to savings for a significant proportion of authorised persons from an overall reduction in compliance costs and there are expected to be efficiency savings. In addition there will be other significant benefits, especially to consumers from an improved regulatory framework.

Enforcement, Sanctions, Monitoring and Review

40.     The regulatory framework contained in the Bill places responsibility, wherever possible, onto the FSA for monitoring and enforcing requirements imposed by or under the legislation. The legislation will also provide for a number of criminal sanctions. A number of bodies, generally including the FSA, will have prosecution powers under the Bill.

HM Treasury

November 1999


1Incremental compliance costs are those costs of complying with regulations that would not be incurred by a well run business in the absence of the regulations. Many firms organise themselves in such a way that the majority of their compliance function contributes to the general well-running of the business and hence is not an incremental compliance cost. Given the Bill's rationalisation of the UK regulatory structure, it is expected that the effect of the Bill on costs is most likely to be felt on the incremental (net) costs of compliance with regulation, rather than the gross costs.      Back


2 Estimates of average incremental compliance costs in paragraphs 15 and 22 are based on mid-points of data presented by Franks, Schaeffer and Staunton, "The direct and compliance costs of financial regulation", Journal of Banking and Finance (1998) 1547-1572 (updated in line with the GDP deflator from the date of the data on which the published figures were based to the end of 1998). (The equivalent figures in the draft RIA published in July 1998 differ only because they were not updated in line with the GDP deflator.)      Back


3 Financial Services Authority Consultation Paper 16, The Future Regulation of Lloyd's, published November 1998.      Back


4 See footnote 2.      Back


5 See footnote 2.      Back


6 "Retail financial services firms" encompasses PIA firms, their appointed representatives, professional firms and former IBRC firms.      Back

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Prepared: 19 November 1999