Peter Cardinali

Finance and Operations – Fees Policy

Financial Services Authority

25 The North Colonnade

Canary Wharf

London E14 5HS

18 December 2012

Dear Peter,

AFM Response toCP12/28, Regulatory fees and levies

  1. I am writing in response to this consultation paper, on behalf of the Association of Financial Mutuals. The objectives we seek from our response are to:
  • Provide our support for the general approach adopted, and provide comments where relevant on specific issues.
  1. The Association of Financial Mutuals (AFM) represents 55 member companies, most of whom are owned by their customers, and who between them manage the savings, protection and healthcare needs of 20 million people, and have total funds under management of over £90 billion. The nature of their ownership and the consequently lower prices, higher returns or better service that typically result, make mutuals accessible and attractive to consumers, and have been recognised by Parliament as worthy of additional consideration by the new regulators.
  1. Wehave provided a brief response to certain questions, and would be pleased to discuss further any of the issues raised by our response.

Yours sincerely,

Chief Executive

Association of Financial Mutuals

Responses to selected questions

Q1: Do you have any comments on the proposed amendments to the FSA’s periodic fees rules to enable them to be adapted for the PRA and FCA?

We fully support the approach taken.

Q4: Do you have any comments on the proposed revised amendments to the FSA’s restructuring SPF rules to enable them to be adapted for the PRA and FCA?

We agree with the proposed approach.

Q5: Do you have any comments on the proposed Option 1 for allocating the FSA defined pension deficit costs under the FCA?

Intuitively we consider that Option 2 would be more logical and fair (notwithstanding that this would increase costs to our members), to ensure that all firms continue to fund the pensions deficit on the same basis that they did previously.

We accept the arguments made for why this may not be practical, but would be happy to engage on alternatives should other responses provide a reasonable approach for allocating differently.

Q6: Do you have any comments on the fees governing principles that we propose the FCA will have regard to when making changes to its methodology for raising fees?

We agree that the general structure of governing principles remain appropriate for the purposes of FCA, but make the following comments:

  • Transparency: it is vital that the new regulators are more accountable for their actions, in order to satisfy a wide range of stakeholders as to the allocation and efficiency of resource. In the past, system limitations made it difficult for the FSA to demonstrate that the costs incurred in its supervision of specific cohorts of firms were in any way consistent with the fees charged. That always left an impression that fee-setting was approximated: for example, in recent years FSA has made significant Special Project Fee charges to insurers in anticipation of Solvency II, and appears not to have had a clear plan on how it would use these fees- each successive year has alluded to a significant underspend- albeit in the absence of normal accounting approaches. Proper transparency should enable a better understanding by the new regulators and their stakeholders of the costs incurred.
  • Predictability: we accept there will be occasions where dramatic changes in the fee scale will be necessary: in such an event we would expect the regulator(s) to be able to explain the rationale for the significant change, and to present clearly their explanation. For example, insurance sector fees rose in 2012/13 by over 40%, but even a strenuous examination of the fees proposals, the FSA business plan and the risk outlook papers did not provide an adequate explanation for this scale of change.
  • Proportionality: we agree that this principle should be extended to ‘consider the impact on dual-regulated firms’. As both PRA and FCA will be required under the Financial Services Bill to provide a separate assessment of the costs and benefits of new proposals where there is a potentially different impact on mutuals, we suggest the principle is extended further to reflect this, for example to add to the amendment ‘…consider the impact on dual-regulated firms and different business models’.

As per our final point above, there is a Compatibility statement for mutual societies for proposals in chapter 2, though this has not been repeated for chapter 3.

In general we consider that regulators should wherever practical adopt best practice and set a high benchmark in this and other areas of their operations.

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