House of Lords - Explanatory Note
Financial Services And Markets Bill - continued          House of Lords

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Other costs

30.     The legislation will result in some Government expenditure. The new Financial Services and Markets Tribunal will be funded by the Government. The costs will depend on the number of cases heard by the Tribunal but provision has been made for costs of £2 million per year. Currently, the Government makes provision for up to £60,000 per annum for the Financial Services Tribunal, but it does not currently fund the costs of all of the other tribunals of the FSA's predecessor bodies.

31.     The Government estimates that the competition provisions in the Bill will, in real terms, result in a negligible increase in recurring costs compared with the costs of the Office of Fair Trading under existing arrangements (£207,000 per annum).

32.     It is also proposed that some form of free legal assistance should be made available for some cases referred to the tribunal under the new market abuse fining regime. Although the Government's view remains that there are good arguments that the market abuse regime is "civil" for the purposes of the European Convention on Human Rights, the safeguard of legal assistance is being introduced in order to meet the concerns which have been expressed in this respect. The cost implications are provisionally estimated as in the region of £2 million a year on average. It is intended that this should be raised through a levy on authorised persons.

Total costs

33.     As already noted, there should no material changes in the compliance costs for groups which are subject only to prudential regulation. Thus the Bill's effect can be analysed in terms of securities firms, investment management firms and retail financial services firms9. Using the same assumptions as in paragraphs 10 and 17, the Bill's effect on total compliance costs can be illustrated as follows:


Securities firms and investment management firms

Retail financial services firms



multi-regulator groups

single regulator groups

multi-regulator groups

single regulator groups


Estimated current incremental compliance cost

£156m pa

£110m pa

£256m pa

Assumed split between multi-regulator and single regulator groups

£109m pa

£47m pa

£55m pa

£55m pa


Assumed % saving in incremental compliance cost

5 %

21/2 %

5 %

21/2 %


Amount of saving

£5.5m pa

£1.2m pa

£2.8m pa

£1.4m pa

£10.9m pa

Assumed one-off transitional compliance cost, as % of current incremental compliance cost

10 %

5 %

10 %

5 %


Amount of one-off cost


£2.4 m




Compliance costs

34.     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.

35.     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.

36.     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

37.     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

38.     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

39.     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

11 February 2000

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

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Prepared: 15 February 2000