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FCA reveals intentions for review of FSCS funding model

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  • 31/10/2016
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FCA reveals intentions for review of FSCS funding model
The City regulator has outlined details of its planned review of the Financial Services Compensation Scheme’s (FSCS) funding model, with a consultation due out next month.

In a letter to Andrew Tyrie MP, chairman of the Treasury Committee, the Financial Conduct Authority’s (FCA) chief executive Andrew Bailey said final rules on the FSCS’s funding would be published by summer 2017, with the new arrangements due to take effect from the 2018-19 levy year.

Among the issues that the FCA will investigate are a review of compensation limits; the levy contribution paid by regulated firms; the potential for risk-based levies; the relationship between FSCS funding and the professional indemnity insurance sector; and an assessment of the FSCS’s overall scope.

The levy paid by regulated firms and providers to the FSCS has been the source of much contention for some time. A review was promised by the FCA in October of last year, with former acting chief executive Tracey McDermott naming the levy “lumpy and unpredictable”. She explained that there was a need for a shift in the way compensation liability was allocated, criticising the model as one that saw “the good guys funding the bad guys”.

In September last year, representatives of network Personal Touch Financial Services saw their member fee rise, in a move that director David Carrington blamed on the liability for mortgage brokers to pay for life and pension costs, due to its inclusion of protection insurance.

In his letter, Bailey said the FCA was considering merging certain funding classes or making more extensive use of the FSCS credit facility, to help smooth the fee paid by firms. Credit facilities give the option for firms to spread the costs of the levy. As part of this, the FCA will also look at the role and responsibilities of product providers in the way that their products are distributed.

Risk-based levies could also be introduced based on certain products or services, a firm’s capital reserves or complaints reported. In addition, plans for FSCS compensation limits could see limits increased on certain areas, particularly relating to pension accumulation or decumulation outside of traditional life insurance products.

Further to this, the FCA plans to introduce protection for some consumer credit activities and will decide whether a separate review of the professional indemnity insurance market is needed in determining its relationship between the market and how the FSCS operates.

Tyrie welcomed the announcement: “There has been talk of reviewing the FSCS levy since 2001, so this is not before time.

“I’m glad that the funding review is well underway, and that the scope of the review includes issues raised by the Committee, such as the unpredictable nature of the levy. It is likely that this will be raised when the Committee sees him [Bailey] next month.”

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