Regulator says new compensation scheme will operate from 1 April 2008
The FSA today confirmed the future funding arrangements for the Financial Services Compensation Scheme (FSCS) which will operate from 1 April 2008.
The regulator said the new system would increase the amount of money available to pay claims, would be simpler to administer and would apportion the cost of compensation between regulated firms as fairly as possible.
FSA Director Graeme Ashley-Fenn said: "An effective system for compensating consumers for losses incurred when a financial services company fails is a vital part of the regulatory system.
“The new model is more rational, fairer to the various players in the market and provides greater levels of funding. It will be capable of meeting current issues, such as endowment mis-selling, and will now also provide compensation for any future potential, and unexpected, claims.”
Ashley-Fenn added: "Notwithstanding recent market developments, we feel it right to continue with the new and improved FSCS funding model. Recent experience shows how much improvements are needed.
“Further changes may be made to the FSCS arising from HM Government and other initiatives - these do not remove the need to improve the scheme now, but will supplement the improvements being made."
The new funding model relates to retail business and:
• introduces a 'widening circle' of funding under which compensation costs emerging from a particular sub-class of firms is borne by that sub-class alone, up to its annual threshold, after which higher costs are shared more widely; and
• expands the overall financial capacity of the scheme - up to a maximum of £4.03 billion per year.
The scheme is divided into five broad classes (life and pensions; investments; general insurance; deposits; and home finance). Each class, except deposits, will have two sub-classes and above these broad classes would be a general retail pool.
The initial tranche of costs will fall to the relevant sub-class, the next to the relevant broad class and then finally above that to a general retail pool. This last level of funding is only expected to be triggered in the event of a significant default, or series of defaults.
In a consultation paper published earlier this year, the FSA explored the possibility of including a final level of extra funding of between £1-2 billion for the FSCS – the so-called wholesale pool.
This would have consisted of firms making contributions based on the amount of wholesale business carried out, covering investment banks, institutional fund managers, wholesale general insurers and reinsurers - as well as the wholesale business of retail firms already subject to the funding arrangements of the FSCS. While there are sound policy reasons for creating a wholesale pool the FSA has decided not to take this issue further at this time.
This decision follows careful consideration of the feedback received during the consultation, and the legal basis of the constitution and potential impact.
