We express concern at the implicit assumption that real costs always have to rise.
We are pleased to submit a brief response to the PRA’s consultation on Regulated fees and levies: rates proposals 2017/18 (CP 4/ 17). We are concerned by the implicit assumption that regulatory fees will always rise (in real terms) – and that building societies, coupled with banks for regulatory fee purposes, bear the brunt. If not retrenching, regulators should at least concentrate on making the most of current resources – as the firms that fund them do.
We note that PRA proposes to set its annual funding requirement (“AFR”) as £266.5 million, which is £9.2 million (4%) higher than 2016/ 2017's AFR of £257.3 million. That increase is well over the rate of inflation and contrasts unfavourably with the FCA’s more modest proposed increase of 1.5%. Given the PRA and FCA both regulate financial services, there should not be such a divergence.
As ever, the bulk of the PRA’s costs is borne by banks and building societies. Deposit acceptors, the fee block capturing these institutions, will fund £151.8 million of the PRA’s ongoing regulatory activities budget (“ORA”) of £246.4 million. This is a rise of 1% from 2016/ 2017. The effect on individual institutions’ regulatory fees could be greater, however: the number of firms among which the costs of ongoing regulatory activities are divided has dropped slightly from 856 to 842.
We agree with the principle of charging affected firms/ sectors for work the PRA carries out solely for them (“non-AFR" costs). Thus we do not object to the continuing treatment of special project fees in this way. Ring fencing is a prime example where only the relevant firms should pay. But the introduction of IFRS 9 will have a profound effect on the whole financial services industry, albeit indirectly, and possibly later, for some firms.
Given its near ten-year development, IFRS 9 could be considered more business as usual with much work already done, rather than a new one-off activity. It is therefore disappointing that the PRA provides no argument for its proposed treatment of IFRS 9 implementation. It states merely: “Increasing levels of preparation work mean that it is now appropriate to move to an implementation fee.” The extra £3.6 million the PRA has identified as relating to the implementation of IFRS 9 will, of course, be borne in part by the 12 building societies that have adopted IFRS. Costs will be allocated to these 12 in relation to their total non-trading book assets, which the PRA considers to be a suitable proxy. This approach does not take into account the complexity of a firm’s business which couldhave an impact on the amount of PRA resource allocated. Once again, firms with simpler, transparent business models such as building societies could end up effectively subsidising more complex firms such as global banks.
Another “non-AFR cost” is Brexit. We do not dispute that it will require a significant amount of work over several years. We are confused by the costs, however. The PRA is requesting £5.4 million in 2017/ 2018 yet the FCA is seeking less than half that figure, £2.5 million.
The PRA says it intends to recover these costs over all fee blocks except the minimum fee block, in proportion to the allocation of fees for the ORA excluding EEA branches. Brexit costs in 2016/ 2017 were recovered through the ORA, but as the work is expected to move into the implementation phase, the PRA proposes a “more transparent and targeted solution”. As with IFRS 9, it could be firms with simpler, clearer business models with very limited Brexit exposures, such as building societies, that may effectively subsidise more complex firms. These are, of course, the firms with significant EU-related business to redesign.
We note the FCA is loading the costs on those fee blocks it thinks will be most affected (that includes building societies and banks). In addition, it says it may in future review the need to recover Brexit costs. We welcome this admission that Brexit may not be as costly as first thought.
What the “non-AFR cost” mechanism could mask the true extent of the increase in overall PRA funding requirements. While it reduces the burden on general fee payers (which is why we support it), in itself it provides little incentive to function efficiently and effectively.
Finally, 2017/ 2018 is the last year for recovery of a proportion of transition (from FSA) costs. We therefore expect to see for 2018/ 2019 a drop in the ORA budget comparable to the annual instalments of £14.7 million that have been applied over the past five years and which next year (and beyond) fall out of the picture.