FSA Unveils Plans To Reform Funding Of Financial Services Compensation Scheme

by Robin Pilgrim, LawAndTax-News.com, London

21 March 2007

The UK's Financial Services Authority (FSA) on Tuesday outlined proposals for reforming the funding of the Financial Services Compensation Scheme (FSCS).

The reforms are designed to create a funding system that will:

• Be more robust and sustainable than the present arrangements;
• Promote a greater degree of consumer protection and maintain market confidence;
• Apportion the cost of compensation between regulated firms as fairly as possible; and
• Be relatively simple to administer.

FSA Director Graeme Ashley-Fenn observed yesterday that:

"An effective system for compensating consumers for losses incurred when a financial services company fails is an important part of the regulatory system. The FSCS makes a vital contribution towards two of the FSA statutory objectives - protecting consumers and maintaining consumer confidence in the financial services industry - a role from which all firms benefit."

The key proposals in the Consultation Paper published on Tuesday relate to retail business and propose:

• Introducing a 'widening circle' model of funding under which the first tranche of compensation costs emerging from a particular sub-class of firms is borne by that sub-class alone, while higher costs are shared more widely; and
• Expanding the overall financial capacity of the scheme - up to a maximum of GBP4.4 billion per annum.

The scheme would be divided into five broad classes (life and pensions; investments; general insurance; deposits; and home finance). Each class would have two sub-classes and above the broad classes would be a general retail pool. The initial tranche of costs would fall to the relevant sub-class, the next tranche to the relevant broad class and then finally above that to a general retail pool. This last resort would only be triggered in the event of a significant default, or series of defaults, which meant losses overwhelmed a single class.

Subject to the consultation process, the FSA proposes that new funding arrangements will come into effect from 1 April 2008.

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