Fair Fees: Treasury moots an end to costly FSCS cross-subsidy

The government is suggesting the break-up of the Financial Services Compensation Scheme (FSCS) as part of its wider reform of City regulation.

A Treasury consultation paper on financial services regulation reform, published this week, considers ending the cross-subsidy arrangements governing the compensation scheme.

Under the first option for the scheme’s future, the FSCS would be broken into a number of separate compensation schemes, thus ending the cross-subsidy of different classes of levy payers. The cross-subsidy has resulted in, for example, insurance companies being expected to bail out banks, and vice versa.

As an alternative, the paper proposes retaining a single scheme under the Consumer Protection and Markets Authority (CPMA), which will take over the FSA’s non-prudential regulation responsibilities.

Ending the cross-subsidy between classes of levy payers would not protect GI brokers against having to pick up the tab for the mis-selling of payment protection insurance (PPI) products – the key driver behind the recent explosion in brokers’ FSCS levy payments. It would, however, remove the threat hanging over brokers that they may have to pay for hugely more expensive bank failures.

The consultation paper is also the first sign that the government is heeding concerns across the financial services sector about the unfairness of the FSCS’s cross-subsidy arrangements.

It also provides a fillip for Insurance Times’s ‘Fair Fees: Brokers won’t pay for banks’ campaign, which is calling for professional general insurance brokers to be given their own ringfenced compensation scheme.

In a further sign of mounting concern about spiralling levies, all-party parliamentary insurance group chair Jonathan Evans warned treasury minister Justine Greening during a parliamentary debate that the increased FSCS levy payments “jeopardised the solvency” of some broker firms.

Biba head of training and compliance Steve White said: “We are not in favour of cross-subsidy, and so we would be happy to see that go. However, we need to reinforce the point that cross-subsidy is not the current problem, which is PPI – the cuckoo in the nest.”

The consultation, which runs until 18 October, says the CPMA will continue the FSA’s current intensive approach towards supervision.