IIB repeats call for review of FSCS

In its response to the HM Treasury discussion paper, Banking Reform Protecting Depositors, the IIB has called for a complete review of the Financial Services Compensation Scheme.

In a statement the IIB said: "Not many months ago, would any right-minded person have believed it possible that an insurance broker could be levied to help pay for depositor or investor compensation, that has no connection with his business whatsoever, other than sharing a common regulator, in which he had no say or choice?

"What the FSA rightly describes as 'controversial and unpopular proposals' (now to be enforced from 1st April 2008) are now more than an expedient to get highly paid incompetent people "off the hook" by passing their financially explosive parcels to total innocents, under the guise of consumer protection – it is a disgrace and those responsible should bow their heads in shame.

"According to the FSA, in its feedback paper on the subject, the intermediary associations supported cross-subsidies across the FSCS sub-schemes once they reach their annual caps. The IIB was the only broker body against the proposals – and that was before the Northern Rock crisis, which has since evidenced the type of massive potential exposures which were of concern to the IIB at the time.

"It has pointed out to HM Treasury that the FSA has failed to ‘come clean’ (by being expressly open and transparent – which it expects of those it regulates), that under its new rules, if a firm like Northern Rock defaulted, the FSCS would hit its annual levy caps and go through them like a ‘steam train’. Pointing out that levies might only amount for 10% of the liability for that year and the FSCS would use its borrowing powers (commercially) to make good the remaining 90%, which would be recovered in subsequent years by raising both caps and levies with ‘fingers crossed’ that there were no further major defaults in the period – just who in the ‘real world’ with a modicum of common sense could possible advocate such potentially disastrous totally unlimited funding arrangements?

The IIB has once again reiterated its calls for product based levies as a sustainable and fair method of meeting FSCS compensation exposures, in addition to a review of the limits. It has informed HM Treasury that this was not properly understood by FSA officials, who also pointed out that, at present, this would not be possible because it would not meet the requirements of s213(5) FSMA – which the IIB says needs amendment."

The IIB said that on balance HM Government "did the right thing" by supporting Northern Rock, whilst there were some strong arguments in the City for letting it ‘go to the wall’, the consequences would have been dire. However, there is now a feeling within the market that a precedent has been set and it would be difficult for government not to support any other bank in future – for this reason, some think that the FSCS will never be called upon to meet any such defaults.

IIB director general, Andrew Paddick said: “[This is dangerous thinking] because the Chancellor wants problems like this off his desk in future, and the FSCS or any replacement arrangements to be able to sort out the mess. On balance we think the USA model for banking failures is the most sensible”.