Britain’s Financial Services Authority published a study on the costs of regulation Tuesday that finds its oversight of the wholesale industry may be a competitive advantage, but its retail regulation may be too heavy handed.

The study was conducted for the FSA and the Practitioner Panel by Deloitte & Touche LLP. It examines the incremental costs of complying with individual FSA rules to firms in three sectors — corporate finance, institutional fund management and investment and pension advice.

The regulatory burden is an ongoing concern to the Canadian financial industry, and repeated industry surveys undertaken by the Financial Services Practitioner Panel found that the costs and burdens of regulation is possibly the single biggest issue of concern to regulated firms in Britain too.

Across all three sectors, the fees collected by the FSA and compliance with record keeping arrangements, spread across a large number of separate rules, incurred the highest incremental regulatory costs. It also found that the retail-oriented investment and pensions advice sector had the highest incremental regulatory costs; including human resource related activities such as training & competence and compliance with certain of the Conduct of Business rules.

In response to the survey, Roy Leighton, chairman of the Financial Services Practitioner Panel said: “The low incremental costs of regulation in the corporate finance and institutional fund management sectors suggests that regulatory burdens in wholesale markets are generally not seen as a barrier to the nation’s international competitiveness, and may be one significant factor among many in its popularity as a destination for mobile capital and investment banking activity.”

As for the retail sector results, Leighton said: “The highly prescriptive nature of these requirements as currently framed in the FSA Handbook is what generates the significant incremental costs in the retail sector. The key issue is what the FSA does with these results. The Panel expects the FSA to take quick and decisive action by removing rules from the FSA Handbook where their costs are not proportional to the benefits that they were intended to secure, and I urge the FSA to produce a clear and detailed action plan to do just that.”

The FSA’s ongoing shift towards a more principles based approach to regulation with the focus on outcome rather than process along with its deregulatory measures should have consequential cost advantages for firms, the FSPP suggested. The panel notes that it will use the results of the study to engage in a debate with the FSA about the burden of regulation and will actively monitor the FSA’s response.

“The industry rightly has an expectation that this study will contribute to seeing real and meaningful improvements in the way that it is regulated and, specifically, on the issue of costs. The panel urges the FSA not to let them down,” Leighton added.

At the same time, the FSA also published its Better Regulation Action, which lays out its plans for reform of its rules first announced in December 2005. And, along with the costs survey, it supplied two other papers, one estimating the administrative costs to firms of providing information to the FSA, and a framework for identifying and measuring the benefits of financial regulation.

“We are determined to strike the right balance between discharging our statutory duties and avoiding unjustified costs. We can do this only with a sound understanding of both the benefits and the costs of regulatory action,” said John Tiner, the FSA’s chief executive. “The three studies published today underpin that understanding and the update on the Better Regulation Action Plan shows the progress made in the last six months.

“The more significant costs appear to arise from providing point of sale documents to retail customers, monitoring employees’ compliance, handling complaints and reporting to the FSA. We have an important programme of work ahead to assess, with an open mind, whether these incremental costs are justified by the benefits and, if not, what changes we need to make,” Tiner added.

The BRAP reports on the progress made since last December and relates that work to the two studies on costs of regulation also published today. In particular, it shows that rules which account for over three quarters of the administrative costs are already subject to review by the FSA. The FSA now intends to use the detailed rule by rule analysis of incremental costs set out in the Cost of Regulation study to shape future regulatory reform.

@page_break@The FSA notes that the results of the costs survey are indicative rather than statistically representative. Also, the results are specific to each sector, and no general conclusion about the total cost of regulation can be drawn from them.

In response to the survey, the FSA’s Consumer Panel stressed that the, “Benefits of financial services regulation must not be lost in the debate on costs.”

The Consumer Panel called on the FSA and the financial services industry to acknowledge the benefits of regulation for consumers of financial services. The chairman of the Financial Services Consumer Panel, John Howard said, “The incremental costs of regulation appear to be not as high in each sector as some had feared. It is not surprising that the report shows that there were higher incremental costs of regulation in the retail sector covering investment and pension advice. This is where improvements in regulation and compliance are being made and continue to need to be made.”

“There is a history of misselling to retail consumers which needs to be rooted out, and the regulator is starting to increase confidence in the sector,” Howard added.

“However, although senior management in firms seem to understand the importance of regulation, there is still a problem that on the high street, consumers continue to face poor advice and information which the regulator must do more to improve,” he said. “These figures seem to counter the argument that strong regulation will undermine business. Consumers who have confidence in a strong regulatory system will be more willing to invest, and an effective and efficient regulator appears to be an international asset, drawing more firms to the UK and also increasing the country’s lead in financial services.”