The Financial Services Authority has gone into debt for the first time and has been told by directors to review its cashflow. The regulator has drawn on a £100m credit agreement with Lloyds Banking Group and has concluded a further borrowing facility of £100m with HSBC.
The FSA spent £347m in the past year, but raised only £324m from fees and other revenues. Although the first facility was agreed with Lloyds before the credit crunch, it remained unused until this year. However, the regulator has already had to sign a further agreement to finance its expected deficit for the current year.
Financial firms are sent notice of the fees they must pay in May of each year and money flows in during the summer. However, expenditure is spread across the year regularly, leaving the regulator's reserves at their lowest in the spring. Although the FSA's cash balance averaged £56m last year, it had fallen to just £200,000 by the end of March this year compared with £24.8m the previous March.
That has meant drawing on the Lloyds facility for the first time, but the board, chaired by Lord Turner, has also sanctioned the additional £100m facility with HSBC. The regulator chose commercial banks rather than turning to the Bank of England or the Treasury.
Lloyds and HSBC are regulated by the FSA and both were told to raise additional capital last year. But while Lloyds had to accept support from the Government, HSBC turned to its own shareholders to boost its balance sheet.
The board of the FSA discussed the HSBC revolving loan facility at a meeting at its headquarters in Canary Wharf, London, but while supporting it, they asked the executive directors to review the regulator's cashflow policy.
The cashflow deficit was exacerbated by a £14m shortfall in fee income from financial services firms at a time when the regulator's costs are rising because of increased supervision. Fees are being raised by an average 36 per cent for the current year: this should give the regulator £435m, and it has announced a tougher regime of fining miscreant firms that could see penalties treble.
The FSA's balance sheet shows liabilities exceeding assets by £123m, partly due to an £89m pension deficit. Taking on debt leaves the regulator highly geared at a time when it is ordering banks to reduce their leverage. However, the FSA said: "Despite our large deficit, we believe we remain able to meet our liabilities because of our statutory power to raise fees."
The terms of the banking arrangements are not public, but the regulator said: "The price of the facility appropriately reflects the strength of our financial covenant." It said the cash has financed enhanced regulation and capital spending on IT that will be recovered from firms over several years.Reuse content