Regulating financial services
The two new financial services regulators will need to demonstrate in future that they are achieving value for money for customers of the financial service industry, according to the National Audit Office.
The combined forecast cost of the Financial Conduct Authority and the Prudential Regulation Authority is £664 million in 2013-14, 24 per cent higher than the cost of the Financial Services Authority in 2012-13. The regulators attribute this increase to additional front-line staff, additional costs to replace information technology and new IT, support and premises costs. The costs, however, are set in the context of the potential benefits of the regulators more effectively reducing harm to consumers and limiting future taxpayer liabilities from financial crises.
The regulators aim to achieve more judgement-based, forward-looking regulation, through a combination of structural changes and actions to change the culture and behaviour of regulatory staff. The NAO found encouraging signs that these changing approaches are bedding down. Supervisors at the working level told the NAO that changing approaches encouraged earlier and more decisive regulatory intervention.
Both regulators, however, face challenges in ensuring they have the right staff capacity. The range and depth of skills required by the regulators has increased with their expanded remits. Current levels of staff turnover, however, are resulting in the departures of skilled and experienced staff, with 26 per cent of those who have resigned from the PRA being classed as ‘high-performers’. More than a third of staff at the FCA have less than two years’ service at the regulator and its predecessor, the FSA. There is a risk that this may begin to undermine industry confidence in the regulators and poses a risk that knowledge within the organization will be lost.
Co-ordinating work between the two regulators will be an ongoing and complex challenge. There is currently a good working-level relationship and communication between staff at both regulators. However, this will need to be built on to manage potential conflict between prudential and conduct objectives.
“These are still early days for the new regulators, and there are encouraging signs that their new approaches are gaining traction. Attracting and retaining the right staff are vital to keeping this progress on track, and so both regulators need to tackle this issue. In future, we will expect the FCA and PRA to demonstrate that their increased costs are achieving value for consumers and the taxpayer.”
Amyas Morse, head of the National Audit Office
Notes for Editors
Estimated value of the UK financial services industry
FTE working for the PRA and FCA
Forecast combined cost of the two regulators in 2013-14
Regulators' expected increase in the cost of regulation between 2012-13 under the Financial Services Authority and 2013-14 under the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA)
Firms whose conduct is regulated by the FCA
Firms prudentially regulated by the FCA
Firms prudentially regulated by the PRA
Value of regulatory fines levied in 2013
9.7 per cent
2013 annualised staff turnover at the FCA
11.7 per cent
2013 annualised staff turnover at the PRA
1. The Financial Services Act 2012 created the Financial Conduct Authority and the Prudential Regulation Authority to replace the Financial Services Authority from April 2013. The PRA undertakes prudential regulation of all banks, building societies, insurers and credit unions, and major investment firms. The FCA is responsible for conduct regulation, as well as prudential regulation of firms not covered by the PRA.
2. Press notices and reports are available from the date of publication on the NAO website, which is at www.nao.org.uk. Hard copies can be obtained by using the relevant links on our website.
3. The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Amyas Morse, is an Officer of the House of Commons and leads the NAO, which employs some 860 staff. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services, and our work led to audited savings of almost £1.2 billion in 2012.