B&B bailout is a threat to brokers, says IIB

Brokers' livelihoods could be under threat following the Bradford & Bingley bailout, according to Barbara Bradshaw, chief executive of the Institute of Insurance Brokers.

In a statement, Bradshaw said that by invoking the Financial Services Compensation Scheme, which has provided funding of approximately £14 billion pounds to enable Spanish-owned Abbey to take over B&B’s branches and deposits, the government has been able to claim that the taxpayer is not involved in the bailout.

However, due to the way the FSCS is funded, only the first £1.8 billion of the scheme’s £4.03 billion capacity falls to banks and other deposit takers for payment. Losses beyond this are paid for by the wider financial services community, including insurers and financial services intermediaries, she added.

“Like the banks, which can increase charges to cover the costs involved, insurance companies can easily hike premiums in order to recoup any increase in the FCSC levy,” said Bradshaw.

"However, insurance brokers and independent financial advisers have no such ability and could end up having to pay huge levies out of their profits. This could make the difference between survival and going to the wall, for some.”

The statement added the the IIB had been lobbying for more than two years to prevent the change which came into effect in April 2008, creating a ‘general retail pool’ under the FSCS which can make insurance brokers responsible for losses incurred by failed banks and insurance companies.

Although in the first year the cost of this exercise to the FSCS is likely to be limited to interest charges estimated at £900 million, and should therefore fall solely on the ‘deposit’ class, if in future the government cannot recover the mortgage interest and repayments that are intended to cover the £14 billion payment to Abbey, this looks set to fall upon the FSCS. The FSCS can easily increase its capacity for future years, which will increase insurance brokers’ exposure even more, it said.

John Greenway MP, president of IIB, said: “The way this deal has been put together is highly questionable. Effectively, it put the onus on the FSCS to fund the take-over.

The government and FSA have created a worrying precedent. Even if there is no substantial cost to insurance intermediaries this time round, the next failure of a bank could put some smaller to medium sized insurance brokers and IFAs – firms that have no responsibility for the mess and are actually potential victims of it – out of business.”

He added: “Corporate depositors such as insurance brokers are not even covered by the FSCS in respect of their own bank deposits. So they are doubly at jeopardy.

"It is interesting to see that the government has clearly learned one lesson from Northern Rock; that by acting quickly on a Saturday morning, it can avoid the political fall-out associated with a bank failure and quickly transfer the cost to others. It is the firms which have acted more prudently (possibly to their own commercial disadvantage in the past) that will have to pay.”