FSA opens consultation on funding UK retail bank compensation scheme

25 July 2012

The Financial Services Authority (FSA) has proposed changes to the funding of the UK Financial Services Compensation Scheme (FSCS) which was increased in value to cover up to £85,000 for individual retail bank customers in the UK in the event of a bank failure, following the run on Northern rock in 2007. The FSA also subsequently imposed a centralised guarantee and technology reporting function whereby a shared tech solution covering every bank in the UK has to be able to report and provide a compensation plan within just seven days.

The FSCS funding model review puts forward what the FSA says is “a credible funding approach balancing the need for adequacy of funds with affordability for those contributing”.

The current funding model has been in place since April 2008. It provides compensation for UK retail bank customers if a regulated financial services firm goes out of business or cannot pay claims made against it. The scheme is funded by contributions from regulated firms based on the type of business they carry out (their funding class). Since the last update in 2008, however, there have been significant payouts, resulting in sizable levies for some funding classes. However, the FSA asserts that the last four years have also proven the need for the scheme and believes that in terms of consumer confidence it is absolutely vital to have a compensation scheme in place.

The main features out for consultation in the revised funding model FSA proposals are:

• Two separate approaches for funding FSCS’ costs are being considered. One is for activities the FSA expect will be subject to its successor body, the Prudential Regulation Authority’s (PRA) funding rules for the FSCS, covering deposit takers and insurance providers. The other is for activities that will be subject to the Financial Conduct Authority’s (FCA) funding rules. There would be no cross-subsidy between the two when the FSA is disbanded in 2013 and its successor bodies take over.

• No changes to the current funding classes are envisaged in the proposals.

• A retail pool made up of all classes the UK regulator expects to be subject to the FCA’s funding rules. This would be triggered if one or more FCA classes reached their annual threshold (i.e. the limit that funding class would be expected to contribute in any one year).

• Revised annual thresholds based on assessments of affordability.

• The FSCS to consider potential compensation costs expected in the 36 months following the levy instead of twelve months as is currently the case (except for the deposit class). This should smooth the impact of onerous levies and may make levy requirements more predictable than now. At present, the levy impact building societies and other smaller players particularly hard.

The consultation will run until 25 October 2012. Commenting on it Sheila Nicoll, FSA director of conduct policy, said: “A viable compensation scheme is essential to financial services – investors and savers need to have confidence. The industry can agree on that, but as soon as it comes to discussions about funding, all such agreement immediately breaks down”.

“Compensation funding inevitably means that different sectors have competing interests. Our role has been to walk the middle ground and produce a workable solution that we believe the entire industry can afford and live with. We would urge all stakeholders engage with us in this funding review. Any changes that we make have to produce a system that is as fair as possible, but ultimately plays its part in underpinning confidence in the financial services sector.”

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