Our response to the FCA’s consultation paper, Regulatory fees and levies: policy proposals for 2014/15, CP 13/14
The Building Societies Association (BSA) represents mutual lenders and deposit takers in the UK including all 45 UK building societies. Mutual lenders and deposit takers have total assets of nearly £380 billion and, together with their subsidiaries, hold residential mortgages of nearly £260 billion, 20% of the total outstanding in the UK. They hold over £260 billion of retail deposits, accounting for 21% of all such deposits in the UK. Mutual deposit takers account for over 30% of cash ISA balances. They employ approximately 50,000 full and part-time staff and operate through approximately 1,900 branches.
We welcome the opportunity to comment on the proposed changes in PRA fees.
Q1: Do you agree with our proposals for consumer credit application fees?
The FCA takes over regulation of consumer credit from the Office of Fair Trading on 1 April 2014. The FCA intends to recover both the set-up costs of the new regime and the annual running costs from firms that extend consumer credit.
Our members have noted that the migration of responsibility to the FCA has brought with it the unwelcome addition of far higher fees. We have argued previously that better regulation should not necessarily mean more expensive regulation.
Firms that wish to continue trading will have to apply for FCA authorisation and pay an application fee. Application fees and periodic fees will be based on two types of firm: those with limited consumer credit permissions and those with full consumer credit permissions. Fees for limited authorisation are set at two levels, consumer credit income up to £50,000 and all other firms. Firms applying for a limited permission with an annual consumer credit income of up to £50,000 will be charged a £100 application fee with all other firms charged a £500 application fee.
Fees for full authorisation will now be divided into three levels of complexity (straightforward, moderately complex and complex) and amount of consumer credit income (up to £50K, £50K to £100K, £100K to £250K, £250K to £1 million and over £1 million) as an indicator of the resources needed to process them. Fees for full authorisation range from £600 to £15,000 depending on a firm's level of complexity and size.
We note the FCA’s move in December to revise its proposals to accommodate smaller firms seeking full permission. The revised matrix suggests that essentially larger firms, whether they are in the straightforward or a complex category, will now be required to pay far higher application fees than signalled in the first consultation. Rather than base application fees on the resources needed to process them, the regulator is now suggesting that resources matter less than size/ income: larger, particularly less complex firms, it could be argued, are to be used to support smaller firms. This is far more akin to a tax. This could be construed as the direction the FCA may favour when it starts its review of fees policy in 2014.
Q2: Do you agree with our proposed charge of £3,500 per type of agreement submitted for a consumer credit validation order?
Under the OFT’s licensing regime, validation orders provide retrospective validation for credit agreements that would otherwise be unenforceable due to unlicensed trading. This is a new power introduced on 1 April 2013. The FCA intends to keep it and has used best estimates of staff time necessary to calculate the figure. We note this figure will be kept under review; should the resources be less than first thought, we expect it to be reduced appropriately.
Q3: Do you agree with our proposed structure for periodic (annual) fees for consumer credit firms?
The proposed structure mirrors that for other types of regulated business so we have no objection to the set up. But as we have stated previously, our concern relates more to the total amount of costs the regulator seeks to recover from firms than the way it intends to go about it.
The arguments put forward by the FCA for just two fee blocks - those with limited and those will full permission - are welcome and sensible. We suggest the FCA reviews the division periodically to ensure firms are not disadvantaged. In addition, the metric of consumer credit income as the tariff base seems fair, uncomplicated and transparent. For our members, the worry is how limited permission will be defined in practice. We would like confirmation from the regulator that the default will not be full permission.
We note that small firms already authorised in the A fee blocks will pay the consumer credit minimum fee in addition to their A block minimum fee and any applicable A block variable fee. We also note that the charges reflect recovery of the set-up costs. We would like to know over what period this recovery will be charged so we can gauge when the fees will drop.
Minimum fees depend on the amount of consumer credit income a firm earns; this is consistent with other aspects of consumer credit fees policy. It also adds a layer of complication, and differs from other minimum fees. We there should be one minimum fee for consumer credit regardless of relevant income.
Q4: Do you have any comments on our draft definitions of consumer credit income and proposals for reporting the data?
The definitions of consumer credit income provided in Appendix 1 of the consultation appear mostly clear. We welcome the clear statement that firms report total consumer credit fee income – without a breakdown - on the basis of their latest accounts, whatever their own financial year might be. This should, as the FCA says, stop firms having to go through unnecessary data collation exercises.
We would, however, welcome further clarification on “income” from credit.
One area of possible difficulty is the treatment of interchange, the amount passed to building societies (and banks) by the card supplier from third party merchants for using the societies’ (banks) cards to make payments. We would welcome clarity on whether interchange should be included as other related income for current account debit cards and credit cards. In our view, it should not be for the former.
For debit cards, the amount passed in interchange can be from accounts both in credit and in overdraft. For current accounts that are in credit it could be argued that the interchange is not from the provision of credit. However, it would be impossible for institutions to identify and account for interchange from accounts in credit and those that are overdrawn. In light of this, we strongly suggest that interchange is explicitly excluded from “other related income” for current account debit cards.
Another possible area of difficulty is the requirement to fair value services where firms have taken business decisions not to charge or to discount their charges. The consultation says the concept of fair value is common in accounting. That is true under IFRS but that under current UK GAAP, firms are not required to use fair value – this changes under FRS 102, the new standard, but it is still possible to avoid FV calculations.
Q5: Do you have any comments on our proposed concessions on consumer credit fees for businesses with social objectives?
We support the proposal to make not-for-profit bodies exempt from all application and periodic fees, provided they are able to prove they are a “not-for-profit debt advice body”. It is important these bodies can continue to offer free debt advice to vulnerable consumers.
Not part of this consultation but pertinent to the issue of concessions is the definition of “businesses with social objectives”. The consultation notes the government’s encouragement of the expansion of credit unions is related to its plan to improve the range of socially responsible choices. An established purveyor of such choices is the mutual sector.
Mutuals such as building societies are directly owned by their members and are core contributors to the diversity in the UK retail financial services sector. As the government acknowledges, a diverse retail financial services market is of benefit both to consumers and to the stability of the financial system. Diversity delivers greater competition and choice which benefits consumers and also aids the overall stability of the financial system.
The smallest building societies are a comparable size to the larger credit unions – they also offer similar basic savings and loans. In view of this, we question why they are not regarded as “businesses with social objectives” and therefore barred from reduced application fees and exemption from minimum fees? There should be consistency in approach from the FCA.
Q6: Do you have any comments on our proposed approach to the ombudsman service levy for consumer credit firms?
We note that the FCA will charge firms with limited consumer credit permissions a small flat fee, in the region of £25-£50. Our question revolves around the cost effectiveness of calculating and collecting such a low sum.
Q7: Do you have any comments on our proposed approach to the Money Advice Service levy for consumer credit firms?
Once again the cost effectiveness of calculating and collecting a minimum fee of £10 should be examined. Otherwise the proposal to base the MAS levy on the FCA model appears sensible.
Q8: Do you have any comments on our proposal to create a new fee-block for firms holding client money or assets or both?
Q9: Do you have any comments on our redrafted definitions of income for fee-blocks A13, A14, A18 and A19?
We have already had an answer from the FCA on the definition of annual income for fee block A.18, home finance providers, advisers and arrangers (Appendix 2). The FCA has confirmed that the income definition in the appendix at (a) is in fact what was (2) - the income received from mortgages sold by brokers - under the current rules.
Q10: Do you agree with our proposed annual maintenance charge for approved reporting mechanisms (ARMs)?
Q11: Do you agree with our proposal to require application fees to be paid by credit or debit card?
We are pleased to note that paper-based options such as cheques and bankers’ drafts remain permissible for dual regulated firms. For some such firms, credit and debit cards may not have been appropriate.
Q12: Do you agree with our proposal to calculate the first year’s periodic fee of a newly authorised firm on a monthly pro-rata basis?
This seems a sensible proposal and more equitable than the current arrangement which sees the first year’s fees calculated on a quarterly basis. We note the PRA is proposing a similar move.
Q13: Do you agree with our proposed technical clarifications to the FCA fees manual?
Q14: Do you agree with our proposed amendment to the FCA financial penalty scheme?
We agree with the proposed addition to the current scheme to allow penalties in respect of firms that pay or receive referral fees in personal injury claims to be treated on the same basis as other FSMA penalties.
Q15: Do you agree that we should use the three component approach, evenly allocated, of using consumer-usage data, the five Money Advice Service outcomes and a levy based on our own allocation for 2013/14 to allocate money advice costs to fee-blocks? If not, please give your reasons and suggest an alternative.
Q16: Do you agree with how the consumer-usage data has been mapped to Money Advice Service fee blocks? If not, please give your reasons and suggest an alternative.
Q17: Do you agree with how the consumer outcomes have been mapped to Money Advice Service fee-blocks? If not, please give your reasons and suggest an alternative.
Q18: Do you agree that the debt advice costs should take account of both total lending and write off levels, on a 50% basis for each, and mapped to A1 and A2 feeblocks? If not, please give your reasons and suggest an alternative.
The Money Advice Service has been working with trade bodies such as the BSA to find a longer term allocation model for 2014/ 15 and beyond. Along with other trade bodies, we had been critical of the initial proposals, and continue to question the rapidly rising amount of funding required (not part of this consultation). The proposed allocation for 2014/ 15 shows that, on a combined basis, the A.1 - deposit takers - and A.2 - home finance providers and administrators - fee blocks are paying slightly more in 2014/ 15 than the previous year (£19.3 million compared to £18.5 million).
It has been agreed that separate formulas for money advice and debt advice will continue but new ways to allocate both types of advice should be found.
There are three components that will, in the short term at least, carry equal weight:
how consumers use the four channels (web, telephone, face-to-face, and printed literature), which will be weighted by the relevant costs of the different channels.
mapping the Money Advice Service’s five outcomes, as set out in its business plan, to appropriate fee blocks. The outcomes are managing debt well, saving regularly, saving for retirement, protecting assets and making provisions for dependents.
a levy based on how MAS allocates its annual funding requirement.
We think that the above weighting is a good starting point but stress that it should be reviewed regularly, particularly in the first few years of operation to ensure a fair as possible outcome for those that fund MAS. This includes investigating ways to require other providers of money advice to contribute. Quite wrongly, building societies have been bracketed with large complex international plc banks that have far deeper pockets to fund this service.
Utility companies and other significant sources of non-banking consumer debt are still not being charged for debt advice. Instead the current funders, the A.1 and A.2 fee blocks – affecting all the BSA membership - will continue to pay for the service. This time though it will be on a 50/50 total lending and write-off basis compared to the previous 15/85 lending volume split. This sees fees for the whole A.1 category jump 230% while those for A.2 drop 40.6%.
We continue to question the cost effectiveness of collecting the £10 minimum levy.
 Using the indicative variable fees provided in chapter 2.43.