Recovering the costs of administering the regulatory gateway through application fees
Response by the Council of Mortgage Lenders
to the FCA discussion paper
Introduction
1.
The CML is the representative trade body for the first charge residential mortgage lending
industry, which includes banks, building societies and specialist lenders. Our members currently hold
around 95% of the assets of the UK mortgage market.
2.
We welcome the opportunity to respond to the Financial Conduct Authority’s (FCA) discussion
paper on recovering the cost of administering the regulatory gateway. This response gives both our
general view on this topic as well as our specific comments on the topics in the discussion paper.
3.
We are happy for the FCA to share our comments with the Prudential Regulation Authority.
General comments
4.
We welcome the FCA’s decision to seek views on this issue before developing its policy.
Fees for entry to a market or expansion in a market are clearly one of a number of factors prospective
and existing mortgage lenders will consider when deciding on a course of action; they are closely
linked to competition and innovation. Fees must therefore be suitable for both existing participants
and prospective entrants.
5.
This discussion paper makes clear the decision to review the existing fee structure comes
from an increase in the cost of administering the regulatory gateway and the decline of the fees in real
terms. It presents a range of options to allow costs to be shared between existing and prospective
participants and small and large firms.
6.
We recognise the reasons for reviewing fees. However, we note there is little consideration of
controlling costs. The discussion paper states the cost of “chargeable activities” was £7.9 million in
2013/14. It then proceeds from this point, using the £7.9 million figure as its benchmark. We would
have liked to have seen the FCA at least note the possibility that costs could be controlled. We would
also have liked to have seen a longer list of the components of the £7.9 million figure.
7.
The discussion paper also does not forecast costs over the coming years. This would have
been useful, especially given the FCA’s competition powers and the likelihood of an increase in the
volume of applications. We therefore agree with the suggestion that fees are reviewed more regularly.
This will increase certainty and reduce the possibility of large proportionate increases.
8.
The discussion paper presents several options for raising fees. The FCA should consider the
effect on application volumes of a one-off increase. The FCA should also ensure any spike in
applications this does not mean unnecessary delay in authorisations. This could be mitigated by not
opting for a steep increase or by increasing costs in phases.
9.
Whichever fee increase scenario is adopted, the FCA should ensure clear guidance is given
about when the new fees apply and whether applications submitted before the effective-from date but
authorised afterwards will continue to be charged at the previous rate.
10.
We believe the FCA needs to be mindful of the impact of the rising cost of regulatory
compliance. The mortgage industry has just finished implementing the Mortgage Market Review and it
is about to begin implementing the Mortgage Credit Directive. Innovation is not fostered by making
business more expensive.
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Distributing the recovery of authorisation costs between different fee-payers
11.
We agree costs should be shared between prospective and existing participants.
12.
There are a number of reasons applicants should pay towards the cost of authorisation.
Principally the applicant may benefit from authorisation and its paying a fee recognises this. The
FCA’s volume of work increases when applications are made. (It may rise further with the duty to
promote competition and an increase in the number of regulated markets.) Charging also increases
the likelihood applications will be adequate when submitted, which helps control costs.
13.
Some benefits also accrue to existing firms from the authorisation process. Existing firms can
be confident new entrants have been thoroughly tested. This reduces the possibility of adverse
consequences for the market in which existing firms operate.
14.
The consequences of not charging an application fee are largely implied above. It may mean
applications are submitted before they are ready. It could increase the likelihood of speculative
applications. Not charging could also increase in FCA costs: we expect the authorisation process
would still be needed irrespective of the preparedness or completeness of an application. Not
charging also implies all the benefits accrue to existing firms, which is not the case.
15.
We have no information on the scale of FCA application fees relative to that of other costs
incurred in creating a new business.
16.
We welcome the discussion paper’s asking about the effect of application fees on existing
firms’ decisions to apply for variations in permissions. The FCA likely does not know how many
existing firms have been deterred by its fees. However, given the current pressures on firms it is
possible some firms may not have applied for variations in permissions because of the application
fee. Its innovation objective means the FCA should be mindful of such effects and work to minimise
them where possible.
17.
We believe the current recovery of costs across application types is broadly adequate.
Complex applications are likely to take the most resources to evaluate so charging more for them
seems appropriate. However, it is difficult to judge whether the FCA should weigh cost recovery more
heavily towards complex applications without more detailed information about what proportion of
costs incurred is recovered by each fee type in the existing regime.
18.
We consider options two and three in table 3.1 the most viable of those presented in the
discussion paper. They are consistent with our view that costs are shared between applicants and
existing firms. However, we do not consider an arbitrary doubling of fees (scenario three) to be a good
basis on which to proceed. It creates an awkward precedent for the next fees review, for example.
19.
We believe an inflation-adjusted increase to be the most preferred option among those
presented. It retains the cost-sharing principle. It establishes a predictable basis on which to make
any further increases. It is also a uniform increase, meaning no one application type rises more than
another. It is also the smallest rise of the options presented, preventing one or all application types
facing a very steep one-off increase in fees.
Suggestions for revising application fees
20.
We accept the FCA’s view on fast-tracking of applications. We recognise such a system could
challenge the competition objective and that it may be difficult to implement.
21.
However, we believe the criteria applied to consideration of application fast-tracking have not
been applied to consideration of the very straightforward fee. It is not clear which firms this new fee
type would benefit and it appears it is skewed in favour of smaller firms, leaving larger firms to bear a
far higher share of costs.
22.
The basis for introducing this new fee type would benefit from more detailed justification. The
discussion paper says the new fee will “streamline the process for assessing our most straightforward
applications”. Assessing the value of a new fee type would have been aided by, among other things,
evidence that submitters of the most straightforward applications have sought this option.
23.
We are also uncertain of the marginal benefit of the new fee type. The ‘very straightforward’
fees proposed in table 4.1 are not substantially lower than the ‘straightforward’ fee. In scenario a the
‘very straightforward’ fee is 60% of the ‘straightforward’ fee but the ‘straightforward’ fee is just seven
per cent of the ‘moderately complex’ fee. This point is especially pertinent given the high increase in
more complex fees that would be necessary to introduce the new fee type.
24.
We agree fees should be reviewed more regularly. Doing so would prevent a situation where
firms suddenly face much higher costs. As we have identified elsewhere in this response an inflationlinked increase may be most effective. This would provide certainty for both the FCA and firms. It
would also prevent sudden steep increases.
25.
The FCA holding the right to amend the policy if circumstances change would need to be
transparent. We would expect the FCA to consult if it did decide to amend the process. Similarly we
would expect any periodic reviews linked to a policy of inflation-linked increases to be consulted on.
26.
Despite our broad agreement for a regular revision of fees, we believe the FCA should
provide more information about its authorisation costs. As noted earlier, the discussion paper does
not explain in detail how the £7.9 million figure is derived. A more transparent explanation would have
been useful.
27.
We agree that the cost of changes in control should be borne largely by the firm concerned.
We also agree there are complications, as the discussion paper notes, and we add that a change in
control for systemically important reasons might mean some benefits are shared between the firm
concerned and the industry.
28.
One option might be to introduce a threshold below which the FCA bears the full cost and
above which costs are shared between the firm concerned and the FCA. This means a fee is not
levied for a legally required activity. It also provides an incentive for the FCA to control costs because
it will bear some of the above-threshold costs. It is also in line with our principle of sharing costs
between the firm concerned and the rest of the industry.
Contact
29.
This response has been prepared with insight and comments from CML members. Please
send comments or questions on the content to Andrew MacLachlan, senior policy adviser, at
[email protected].