Regulation in the time of Covid: Part 3 (59) 1/4 - CMCs, high cost lenders and the fees' conundrum

Starting on 16 March last year, I began writing daily blogs about the impact of the Covid crisis on financial regulation. Other issues, notably Brexit and digitisation, have featured as well but Covid remains the dominant driver of regulation as we enter 2021.

The FCA's plea to claims management companies (CMCs) and high cost lenders (HCLs) to "work better together", is an implicit admission that the current system isn't working. This is not primarily the regulator's fault but rather a reflection of the inadequacy of the statutory framework when faced, as the FCA often is, with small sectors of the market that generate large volumes of regulatory work.

The core of the problem is the principle, in FSMA, that firms should pay fees in relation to the cost of regulating them. In practice, however, fee levels are also limited by the number of firms undertaking a given activity, and by their size and profitability. There is some implicit cross-subsidy baked in, with the biggest firms largely funding the regulator's infrastructure, but the overall effect constrains the FCA's ability to target resources. The FCA will probably have assigned more resources to both CMCs and HCLs than their fees strictly justify, but their numbers and size mean this is almost certainly less than their potential to cause harm would dictate. Hence the strategy of semi-disengagement.

Stepping back, there are two sides to this conundrum: (1) the trade-offs it requires - any additional resources for CMCs and HCLs need to come from somewhere else; and (2) the reality that the fee structure doesn't reflect the risk profile of the activities the FCA regulates so much as their ability to pay. The CMC/HCL issue is just one of many examples where the outcome suffers as a result.

The current system works relatively well for the PRA, where size is a reasonable proxy for risk, but much less so for an FCA concerned with vulnerable consumers and financial crime, where size if often irrelevant. It's unlikely the FCA can improve its performance significantly without a solution to this mismatch.

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