The Financial Markets Authority (FMA) reported a worse-than-budgeted deficit in the 2019/20 fiscal year, falling $5.6 million into the red largely on ballooning employment costs and a shortfall in adviser licensing revenue.
According to the FMA annual report released last week, the latest deficit was about $850,000 above budget forecasts of $4.7 million.
Employee expenses rose to almost $29.6 million in the annual period compared to the projected $28.6 million and $5 million above the previous year’s figure.
“Overall personnel costs were higher due to having fewer than expected vacancies during the year, which is partly driven by COVID-19,” the report says. “The accumulated annual leave balance was also significantly higher than budget as staff holiday plans were impacted by COVID-19.”
Total FMA staff numbers hit 122 by June 30 this year, representing an increase of 30 over the 12-month period as the regulator geared up for expanded duties under the Financial Services Legislation Amendment Act (FSLAA).
Staff costs would’ve been higher still had not FMA chief, Rob Everett, taken a temporary pay cut during the year that knocked up to $50,000 off his annual income.
“In line with other public sector agencies, the FMA’s Chief Executive took a voluntary 20% reduction in salary for six months from 1 June 2020 as well as a further voluntary reduction in performance pay for the 2019/20 financial year,” the report says.
Following the adjustment, the chief’s remuneration band fell between $590,000 to $600,000, down from $630,000 to $640,000 last year.
However, the pandemic-related nine-month delay to the FSLAA regime start-date – now slated for March 15 next year – also saw the FMA revenue fall under budget as adviser licensing income failed to materialise in the timeframe.
Overall ‘other’ revenue came in at $930,000 against the forecast $2 million, largely as the FSLAA extension slowed transitional financial adviser provider (FAP) applications: licence fees in the year amounted to just $610,000.
Roughly, 2,000 entities are expected to fall under FSLAA next year but as at late December just over 1,700 advisory firms have signed up on the Financial Services Providers Register – the precursor to licensing.
Despite the coronavirus disruption, the FMA ticked off most of the 31 items in its to-do list for the year with just five “not completed or progressed as intended in 2019/20”.
“These are all thematic review projects that were given lower priority during the COVID-19 alert levels,” the report says. “Of these, the derivatives issuer sector risk assessment and the report on KiwiSaver fees and value for money have since been completed. Work on the MIS sector risk assessment, IMF Financial Sector Assessment Program recommendations, and [managed investment scheme] MIS liquidity stress-testing review is ongoing.”
As well as FSLAA, the regulator will be handed extra responsibilities once the Financial Markets (Conduct of Institutions) legislation comes into force. Colloquially known as COFI, the law will introduce new conduct obligations and a licensing regime on banks, insurers and other institutions.
Due for its second reading next year, COFI ended 2020 at 11th on the parliamentary order paper.
In the latest annual report, Everett and FMA chair, Mark Todd, note that “the imminent changes to financial markets regulation will benefit from lessons learned this past year”.
“Although it hasn’t been an easy time, it has been encouraging to see examples of industry applying principles of good conduct and striving to do right by their customers. Where we have seen poor conduct, it is usually not malicious, but the result of a lack of care or attention. This is generally easy to remedy, although in some cases we’ve had to give more than one prod before we see improvement,” the FMA power couple note.
“While the changes on the horizon may seem significant when taken at face value, they are essentially about formalising and putting more weight behind the expectations that we already have, and that firms should already be meeting.”
The 2019/20 budget miss should also hardly bother the FMA with the regulator set to receive a massive funding boost over the next few years. Under plans unveiled in May, the FMA government appropriation will rise to $48.5 million in the current financial year (from $36 million in 2019/20) to almost $61 million by the 2022/23 tax season.
Industry levies, revised in May, will ultimately cover 83 per cent of FMA costs, up from 75 per cent at present.