Financial Regulation: a preliminary consideration of the Government's proposals - Treasury Contents


Supplementary Written evidence submitted by the Investment Management Association

  1.  This note is supplemental to the oral evidence given by Richard Saunders of the Investment Management Association on 14 October 2010.

  2.  At that hearing the Treasury Select Committee noted (to the IMA and ABI) that it would be interested in trying to establish what is the real compliance cost of regulation. More specifically the Committee stated that "It would be hugely helpful if, on behalf of your respective industries, you could examine in detail what you think the full compliance cost is of existing regulation at this time of turbulence in the regulatory structure, which would help inform us about what structure is most suitable in the years ahead."

  3.  These are very difficult issues. We have liaised with the ABI and are aware that they are providing a summary of many of the previous pieces of research into the subject.

  4.  We have sought to complement that response and have, after a brief reference to the FSA/Practitioner Panel survey in 2005:

    (a) provided data on staff numbers and a narrative analysis as to how these have changed over recent years; and

    (b) described a further piece of work which is already in progress which may further assist in informing the Committee.

COST OF COMPLIANCE

  5.  We have since the oral evidence considered some of the existing pieces of research on the cost of compliance. The ABI response deals with these more widely, but we would also identify, as they do, the Cost of Regulation Survey produced by Deloitte in 2005 and commissioned by the Financial Services Authority (FSA) and the Practitioner Panel jointly. It is we think the most comprehensive survey into the cost of regulation and have recently sent a link to the Report to the Committee.

  6.  A major issue always in a discussion on absolute regulatory cost is the extent to which any rule can be said to impose an incremental cost, that is to say whether, but for a rule, a firm would act similarly, perhaps because it is seen as good business practice. As the study found, commonly smaller firms identify higher incremental costs from specific rules than larger firms do. This was reported as due to larger firms, once processes are embedded, seeing such activities as good practice. A firm's risk appetite concerning compliance and tendencies to over-comply are also factors.

  7.  The methodologies used in the Survey remain in our view a good model; we have not sought to replicate its work (nor could we in the time available and given our resources). However in the next section we have re-analysed some data already held by the IMA.

  8.  Without deflecting the Committee from the importance of the absolute costs of regulation, the differential costs (or perception of such) across different parts of the financial services industry and across European and global competitors increasingly dominates business decisions on location and expansion. For this reason regulatory initiatives in Europe and by the new UK regulators which place regulation on an increasingly level-playing field domestically and internationally are to be welcomed. Proposals to regulate equivalently the selling of structured deposits, unitised insurance contracts and funds would be an example.

STAFF NUMBERS

  9.  Every year IMA surveys its member firms. The annual survey measures the size of the UK industry as well as looking at the main drivers and trends behinds its evolution. It covers areas such as:

    (a) The size and structure of the industry.

    (b) Client types.

    (c) Asset allocation.

    (d) Mandates.

    (e) Profitability.

  It also features in-depth interviews from senior figures from across the industry.

  10.  Member firms are requested to provide the numbers of staff occupy compliance, legal and audit positions in their firms. We have taken the underlying data since 2005 and have subjected it to a variety of analyses.

  11.  Table 1 shows for 2005 to 2009 a matched sample of firms which provided the aggregate number of directly employed personnel who were in any of Compliance, Legal and Audit (and without necessarily providing any analysis of how many were in each). The data is displayed as a percentage of the total number of staff employed by those firms together. The requirement for a complete match of data across the five years period means there are only nine firms in this sample. On present day values they manage a little over £500 billion between them however. Despite the financial crisis (and presumably some redundancies and cutbacks) 2009 saw the Compliance, Legal and Audit (CL&A) group now reaching 4.4% of staff numbers.

Table 1

AGGREGATE CL&A AS % OF TOTAL UK STAFF (MATCHED SAMPLE)


  12.  Table 2 shows 2005 to 2009 the matched sample of firms which provided the aggregate number of personnel who were in any of Compliance, Legal and Audit and provided an analysis of how many were in each. Seven of the nine firms make up this set. This identifies the growing number of internal audit personnel.

Table 2

BREAKDOWN OF CL&A AS % OF TOTAL UK STAFF (MATCHED SAMPLE)


  13.  Between different firms the distinction between legal and audit roles may be fairly clear but compliance can often blend into both or be entirely separate. This may also be an artefact of the size of firm. Nevertheless whether individual components are compared or the total number they do not appear to be any significant changes across the years being considered. But we consider anecdotally that the underlying trend in risk compliance and audit are upwards, notwithstanding the generally downward pressure on personnel numbers arising from the financial crisis. The number of lawyers seems fairly stable, but recent years have shown a small drop in compliance numbers. Again, anecdotally, we think the need to trim budgets has been a main cause.

  14.  One caveat with respect to larger—particularly international—firms is that asset management firms may also be drawing on other resources within their group. Direct headcount will not therefore necessarily fully reflect the resources being deployed for compliance, legal and audit activity.

  15.  Given the small size of the matched sample, we have also presented the responses in 2005, 2007 and 2009 from a wider group of firms which provided details in each of those years. These are unmatched sample so care must be taken to draw any conclusions in the form of trends. They do show a fairly consistent picture of staff numbers in compliance and compliance-like roles. This however may mask a resource re-allocation process in which as regulatory initiatives have increased since the crisis and risk management initiatives have increased since Lehmans in particular.

  16.  Table 3 presents the unmatched sample of firms which responded across those years and provided the aggregate number of personnel who were in any of Compliance, Legal and Audit (and without necessarily providing any analysis of how many were in each). The data is displayed as a percentage of the total number of staff employed by those firms together. Table 4 below displays the number of respondents each year, split into firms by size of the assets under management.

Table 3

AGGREGATE CL&A AS % OF TOTAL UK STAFF (UNMATCHED SAMPLE)


Table 4

NUMBER OF RESPONDENTS BY SIZE OF AUM


  17.  Table 5 presents the unmatched sample of firms which responded across those years who provided an analysis of how many personnel were in each category. The data is displayed as a percentage of the total number of staff employed by those firms together. Table 6 displays the number of respondents each year, split into firms by size of the assets under management.

Table 5

BREAKDOWN OF CL&A AS % OF TOTAL STAFF


Table 6

NUMBER OF RESPONDENTS BY SIZE OF AUM


  18.  We have presented in Table 7, the 2009 data received by IMA from firms providing an analysis of personnel numbers between the three categories, split by firm size.

Table 7

Breakdown of CL&A as a Share of Total No. Of Staff by Firm Size


  19.  Broadly this supports the experience that smaller firms have to bear a higher cost of compliance (though it says nothing about salaries). The figures behind the above chart are as follows:
<£20bn £20-80bn>£80bn
CL&A6.18%5.30% 3.51%
Compliance3.77%2.63% 2.10%
Legal 1.83%1.81% 1.19%
Audit0.58%0.86% 0.23%


  And the number of firms, the average number of employees and average assets under management for each size group were as follows:
<£20bn £20-80bn>£80bn
Number of Firms3411 9
Average No. of Employees122 463723
Average AUM (£bn)7.33 43.31145.54


  20.  We consider the above supports a view that:

    (a) In the region of 4 to 5% of the number of staff at IMA member firms are in compliance, legal or audit.

    (b) Smaller firms have a proportionately greater number of compliance staff and a proportionately smaller value of AUM per head of staff.

    (c) The numbers remain relatively stable overall though individual firm changes are likely to be more significant.

FURTHER WORK

  21.  Given the challenges involved in addressing the costs of regulation and the existing evidence base, the IMA thought that it might be more practical—and informative—to undertake a short sectoral case study, based on a recent regulatory initiative. We propose to focus on the RDR. Such a study would aim:

    (a) to provide granularity about precisely what is involved in regulatory change—eg. inputting into policy discussions, responding to consultations, planning for changes in business practices;

    (b) to provide granularity about who is involved: ie. that this is not just about compliance costs, but a whole range of business processes; and

    (c) to approximately measure both direct staff time/costs and cost of services such as external support.

  22.  It is important to emphasise, however, that this is not an exercise that would try to offer a judgement on the RDR itself—it is purely an exercise to look at process and cost.

  23.  IMA would hope to provide further evidence in early January 2011 if the Committee would find that informative.

OTHER COSTS—ARROW VISITS

  24.  We had begun to seek information as to the cost incurred in Arrow visits, including management and preparation time. The cost of supervision is not frequently discussed, and after the crisis we recognise that the level of supervision of all firms will increase. Some firms are subject to Arrow visits and others are not, then given a recent suggestion to the IMA that the internal costs of a visit would be in the region of £50,000, the costs of such should be kept in mind in determining the appropriate scope of visits and firms to be visited.

November 2010





 
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