The UK financial regulator wants a 10.1 per cent year-on-year rise in funding to £500.5 million (£807 million) for the 2011/12 year to cover its expanding activities due to rising regulatory burdens.

The request for the funding increase, which the Financial Services Authority says will be paid by “larger firms”, will be used to fund much of the work that was started last year to overhaul regulatory systems in the wake of the 2008 financial panic.

However, although the watchdog said in a statement that the “gross minimum” fee paid by many firms will be unchanged, and all fees in total will drop by 2 per cent from a year ago, the increased funding request is likely to anger some of the largest banks.

The FSA, which had come in for sharp criticism for failing to oversee the banking industry sufficiently in the run-up to the credit crunch, has undertaken a high-profile law enforcement campaign in recent months, such as pursuing alleged insider dealers and other malefactors. Earlier in January, the FSA fined Barclays £7.7 million in relation to the sale of two of its funds; in another example, in December 2010, it fined the UK branch of Zurich Insurance (Zurich UK) £2,275,000 for failing to have adequate systems and controls in place to prevent the loss of customers’ confidential information.

The regulator said that the fines it imposes on malefactors are returned to the industry via discounts to their fees in the following year, explaining why fees in total will be 2 per cent lower than a year ago.

“Longer term, the implementation of new UK and EU policies, along with the cost of managing the transition to two new authorities will continue to put upward pressure on our cost base. However, in general, we would expect these increases to be borne by larger and more complex groups and would hope to minimise the impact on smaller firms,” the FSA said.

The total cost of implementing regulatory reform is yet to be calculated, the regulator continued, adding that a government consultation document issued last July made an initial estimate of £50 million.

The Association of Independent Financial Advisers said it was concerned at continued escalation of the FSA's budget, although it was glad that overall fees will drop.

“Although we welcome a reduced fee for the majority of IFAs, we must ensure there are better checks and balances in place under the new regulatory structure to prevent ever spiralling costs of regulation," said Andrew Strange, AIFA policy director.

“We are pleased to see FSA again acknowledge a risk-based cost allocation approach.This must be extended to ensure that the IFA profession does not bear the cost of regulatory change introduced to tackle systemic risks posed by large institutions," he said.

Last year, the Institute of Economic Affairs, a UK free market think tank, questioned whether the UK needs an overarching single regulator and criticised the rising costs of the FSA since its founding around a decade ago.