Financial Conduct Authority
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FSA consults further on FSCS Funding

The Financial Services Authority (FSA) has confirmed new rules designed to secure funding for the Financial Services Compensation Scheme (FSCS) in a way which is affordable for firms.

The FSCS provides compensation for customers if a regulated financial services firm cannot pay claims made against it.  The scheme is based on funding classes which means that contributions from regulated firms are based on the type of business they carry out and are subject to annual thresholds.

In July 2012, the FSA proposed maintaining existing funding classes but using new annual thresholds based on affordability. Both these proposals will be adopted and will come into force when the FSA is replaced by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) on 1 April 2013.

The FSA also proposed setting up a Retail Pool, a collective resource funded by intermediaries and the investment providers which would be triggered if one or more of those classes reached their threshold. In light of industry concerns about this approach, the FSA recently opened a month long consultation on a proposal that all providers should make contributions when the pool is triggered by the failure of an intermediary. This would include contributions from banks, insurers and home finance providers.

Sheila Nicoll, FSA director of conduct policy, said:

“We have listened to industry concerns and want your input on this revised approach for the FCA Retail Pool. 

“Finding consensus on this subject is always going to be a challenge but we remain committed to finding a workable solution that firms can afford and live with.”

The main features of the recent paper were:

  • There will be no changes to the current funding classes;
  • The proposals for thresholds based on assessments of affordability will be taken forward;
  • The FSA will consult on a proposal for FCA regulated providers to make contributions to the FCA retail pool, when an intermediation class breaches its threshold, rather than just those providers that participate in the FCA FSCS funding classes. The consultation will run until 18 February 2013.
  • From 1 April 2014, the FSCS will be able to smooth the impact of levies by looking further ahead at potential compensation costs expected in the 36 months following the levy instead of twelve months as is currently the case (except for the deposits class).

Notes for editors

  1. The current funding model has been in place since April 2008 but during that time there have been significant payouts, resulting in sizable levies for some funding classes. However, the last four years have proven that in terms of consumer confidence it is absolutely vital to have a compensation scheme in place.
  2. The Review was started in October 2009 but put on hold 12 months later due to uncertainties around the effect of UK regulatory reform on the FSCS and the ongoing development of EU directives. The review began again in October 2011 amidst high profile defaults and continuing pressure on intermediary classes.
  3. There have been significant calls on the FSCS, £20bn in 2008/09 for the deposit class to cover five bank failures, levies of £364m from the intermediation class over the past 4 years and £230m from the fund management class due to the use of cross-subsidy only in 2011. The General Insurance Intermediation class has seen sharp rises principally driven by PPI compensation costs, rising from £2m to £8.5m through to £69.5m.
  4. The FSA’s review was undertaken against the backdrop of the proposed legislative change in the UK. The Financial Services Act 2012 received Royal Assent in December 2012 and the Financial Conduct Authority and Prudential Regulation Authority will come into force in spring 2013. The Act also confirms that responsibility for making the FSCS rules will be split between the PRA and FCA: the PRA for deposit-taking and insurance-provision and the FCA for other activities. 
  5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
  6. The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013 as required by the Financial Services Act 2012.

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