The Financial Markets Authority (FMA) saw licensing income fall by over $200,000 during the 12 months to June 30, as the regulator booked a small overall deficit for the year.
However, the FMA has forecast licensing fee and other ah hoc industry-levied revenue will leap from the $721,000 during the previous financial year to at least $2 million in the current annual period, according to the regulator’s ‘statement of performance expectations’ published this April.
Licensing fees represented just under half of the FMA ‘other’ revenue over the 2018/19 year but the $2 million estimate of industry-sourced money includes the “approximate income we anticipate receiving under regulations that will be introduced as a result of the Financial Services Legislation Amendment Bill [now Act – or FSLAA]”.
The forecast $2 million income is in addition to the ongoing industry levies that are included in the annual FMA government appropriation (currently set at $36 million).
FSLAA licensing and ongoing fees were finalised by the Ministry of Business, Innovation and Employment (MBIE) late last month. But MBIE revealed in an earlier discussion document that about “$3.6 million of the FMA’s annual appropriation is funded through levies charged to the financial advice industry”.
“It is intended that the same amount of funding will continue to be collected from the financial advice industry [under FSLAA], but that the levy classes will be amended to reflect the design of the new regime,” the MBIE paper says. “These changes are not intended to generate additional revenue or increase the FMA’s appropriation.”
While the FSLAA levy reshuffle may be cost-neutral, the FMA faces a budget shortfall this year of almost $5 million, the statement of performance expectation shows.
Even accounting for the $4 million boost to the FMA litigation fund announced by Commerce Minister Kris Faafoi last week, the regulator would still incur an operating deficit of more than $4 million this financial year under current forecasts. Faafoi said the litigation fund annual allowance (which is separate from the broader FMA government appropriation) increase from $2 million to $6 million “ensures the regulator is well placed to respond to misconduct and it sends a clear message that the FMA is resourced to take on those with deep pockets”.
Excluding the litigation fund, FMA expenses were projected to jump to over $42 million in the 2019/20 period compared to the actual $36.2 million booked in the previous year.
As well as the extra FSLAA workload beginning this year, the FMA will likely be handed extra regulatory duties under banking and insurer ‘culture and conduct’ legislation due in parliament before Christmas.
In the regulator’s ‘corporate plan’ – also released earlier this year – FMA chief, Rob Everett, welcomed “the Government’s commitment to fast-track measures to protect customers in their dealings with banks and insurers, and I expect preparation for any potential changes to our regulatory remit will be a key focus of our activity this year”.
Aside from the financial metrics, the regulator either achieved, or was stable year-on-year, across all but a couple of its output targets over the 12 months to June 30 – falling down most notably in the high-level ambition of showing how licensed market players “achieve good customer outcomes”, according to the 2019 annual report released last week.
The FMA missed its already-low target of 40 per cent of licensed entities meeting the ‘good customer outcomes’ goal by half where the “standard of our findings from monitoring reviews dropped to 20%, from last year’s 47.8%, resulting in this measure not being achieved”.
“Following our monitoring reviews, we were only satisfied with two entities out of the 10, where their boards had shown commitment to strong customer proposition and information about customer outcomes was in development,” the annual report says.
“We also completed full assessments on five of the entities’ risk and compliance frameworks, and were only satisfied with one entity, which had started to embed good customer outcomes into its practices.”
Nonetheless, the FMA admits to some sample error in the result that hinged on reviews of just 10 firms chosen for their high-risk activities. (This measure did not include bank and insurer conduct or anti-money laundering breaches.)
“… we think it is likely that the result for these 10 entities is lower than it would be for the licensed population as a whole,” the annual report says.
In a related measure, the FMA report notes just 40 per cent of firms it reviewed during the year could “demonstrate alignment of sales and advice processes resulting in good customer outcomes”: the regulator just squeezed above target on this measure of an “improvement on last year’s result of 38.7%”.
“The entities that achieved the standard demonstrated how they focus on understanding customer goals and finding a suitable product or solution to meet their requirement,” the report says. “Among entities that did not meet the standard, we observed problems with the way advice is offered, and a lack of product suitability testing.”
Elsewhere, the FMA missed (by a smidgeon) a few internal production targets including processing misconduct investigations within certain timelines.
“Staffing levels were a factor in these misconduct case targets being missed, with multiple staff who are typically involved in assessing cases being allocated to the Conduct and Culture reviews on a full-time or part-time basis for various lengths of time throughout the year,” the FMA says.
The conduct and culture effort also distracted the regulator from its aim to “identify perimeter risks, including activity driven by new technology”.
“… we have continued to log misconduct and intelligence reports, but deeper analysis of these has been delayed,” the report says.
As at June 30, the FMA reported employee numbers of 212 compared to 194 at the same time last year. However, ‘voluntary staff turnover’ hit 22 per cent this year compared to 13.8 per cent in 2018.
Just under half of FMA staff earned over $100,000 during the financial year, including Everett who jumped up a $10,000 pay grade to remuneration of between $630,000 to $640,000.