This is our industry self-insurance scheme that allows us to say to consumers that they are protected just like those holiday-makers covered by ATOL and ABTA bonds. Firms will cover the liabilities of others in the industry which have let consumers down.
When the scheme was created participants laboured under the illusion that we would have an effective regulator who would prevent the worst excesses of the market, not allowing issues to run out of control. However the FSA’s failure to detect issues in Northern Rock, Keydata, Arch Cru and PPI, signalled massive industry bills to cover their lack in competence.
In coming to a new solution, any proposals have to operate within some fairly simple but restrictive principles. The current post event funding means that any levies accurately reflect real costs, but given unpredictability, on when they and how much the bill might be means that firms struggle to budget. However a pre-funded scheme may be little better as it sucks much needed capital out of firms then held in a “reservoir” till needed.
Whether we have one big pond of money to cover the whole industry, or whether we need even smaller groups covering more discrete parts of the industry also is a tough call. Today we are picking up big PPI compensation bills. The FSA fee bills now landing on firms door-mats hurt if they hold general insurance permissions. This will run for a couple more years.
So what’s the next big thing? Who knows. What is certain is that when we get the next consultation on this topic from the FSA, which is due shortly, it merits a lot of debate in the three months we will have to respond.
What is difficult is that some of the issues are off-limits as these would have to be changed in the Financial Services Bill, such as the criteria for class composition and the possibility to pre-fund.
