Regulation  

FCA fine-tunes fees and levies allocation

    CPD
    Approx.30min

    The FCA’s consultation paper, CP 13/14, sets out its policy proposals in relation to fees and levies for the next financial year.

    The paper covers fees in a number of areas, including consumer credit, client money, intermediaries’ fees, approved reporting mechanisms, technical amendments and allocating the costs of the Money Advice Service.

    These proposals are sensible and largely uncontroversial. However, there are some significant changes proposed for firms that hold client money and assets. The FCA outlines a change in the way it groups firms when setting fees “to more effectively target the recovery of our costs from firms carrying out investments that hold client money or safeguard and administer custody assets”. This also introduces a common fee rate for all investment intermediaries.

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    Later, I will look at the reasons behind, and the potential impact of, the creation of this new fee block. I will also outline the key points from the paper on the clarification for intermediaries on the definition of income, the proposed maintenance charge for Approved Reporting Mechanisms, and the allocation of the Money Advice Service.

    Fee blocks

    The current position is that firms that hold client money or assets are subject to fee block A12 (advisers, arrangers, dealers or brokers – holding or controlling client money or assets or both). Fee block A13 (advisers, arrangers, dealers or brokers – not holding or controlling client money) is the relevant category for investment intermediaries that do not hold or control client money or assets. Indeed, the ability to hold or control client money or assets is the only difference between the two fee blocks.

    There appears to be two catalysts for change here. Firstly, an anomaly has come to light between these two fee blocks and secondly, it is clear the current fee structure does not reflect the increased supervisory costs associated with firms that hold client money.

    Anomaly

    First the anomaly. Both fee blocks A12 and A13 currently calculate fees as a percentage of relevant income. Firms in fee block A12, on average, pay higher fees than firms in A13, but the headline fee rate per £1,000 of income is lower at £2.39 per £1,000 for A12 firms, as opposed to £6.89 for A13 firms. This result is counterintuitive and raises the possibility of firms applying to hold client money and assets in order to reduce their fees.

    One solution to the problem would simply be to increase the headline fee rate for A12 firms, representing the additional supervision costs associated with firms that hold client money or assets. However, the FCA has, sensibly in my opinion, taken the view that income is not an appropriate tariff base for levying fees that relate to the supervision costs of firms that hold client money or assets and that a fairer result would be achieved by linking the tariff to the amount of client money or assets actually held. This is the second catalyst for change.