FCA to reform the FSCS

The FSCS, which is funded by businesses across the financial industry, steps in when a financial services firm is unable to pay claims against it.

FCA to reform the FSCS

The Financial Conduct Authority has invited views from firms as it looks to reform the Financial Services Compensation Scheme.

The FSCS, which is funded by businesses across the financial industry, steps in when a financial services firm is unable to pay claims against it.

The FCA plans to change funding classes for intermediation, while it said levies should better reflect the risks proposed by particular practices.

Christopher Woolard, executive director of strategy and competition at the FCA, said: “The Financial Services Compensation Scheme plays a vital role in ensuring consumer confidence in financial services.

“We want to ensure protection for consumers and fairness for firms that pay for the compensation.

“We want to have a full debate with all interested stakeholders and this paper sets out the range of fundamental issues we want to discuss.”

The rules for the compensation scheme were last reviewed in March 2013 and since then the scale and impact of the FSCS levies have risen sharply.

The FCA also asked for feedback on professional indemnity insurance and the coverage it provides.

Keith Richards, chief executive of the Personal Finance Society, said: “The Personal Finance Society first proposed the idea of merging the FSCS levy with the cost of professional indemnity insurance, and I’m pleased that this consultation will offer stakeholders an opportunity to put forward their views on potential reforms of both systems.

“We have previously expressed our concern about the current shortfalls of PII, and we are pleased that the FCA has acknowledged these by proposing restrictions on policy excess levels and restricted use of exclusions.

“These proposals need to be examined in greater detail, and it is equally as important that greater competition in the PII market is achieved through the current review.

“While it is disappointing that the FCA has effectively ruled out the possibility of introducing a product levy, it has acknowledged that there are other ways it could more clearly link product risk to FSCS charges.”

He added: “The concept of a risk-based levy, where firms could be eligible for a discount if their behavior reduced risk, has merit and is certainly worth considering in more detail.”

“It is pleasing that the FCA has acknowledged in its consultation paper that the burden of funding the FSCS has fallen disproportionately onto intermediary firms in recent years, however the idea of shifting the burden to product providers should be approached with caution.

“What’s most important is that the burden of FSCS funding is shifted to higher risk segments of our sector. Given the language used by the FCA in its consultation paper, I am optimistic that this will be the result of its review.”

Alan Lakey director at CI Expert, said: "It's encouraging that this is finally being looked at.

"However there is no mention of a product levy and this is the only long-term solution which prevents firms from being asked to make huge and unanticipated payments for the faults of others.

"The problem with setting out specific proposals is that it suggests they have closed their minds to other solutions."