FSCS to look at pre-funding and risk-based levies

The Financial Services Compensation Scheme will look at pre-funding and introducing a risk component to its funding process as part of this year’s review.

The FSA aims to consult on a review of the FSCS funding model in the first half of the year. The review was started in October 2009 but delayed a year later due to regulatory reform in the UK and ongoing development of the European investor compensation scheme directive.

Speaking at the Insurance Institute of London today, FSCS chief executive Mark Neale (pictured) said in order to protect consumers it was important the scheme had the support of the industry with a sustainable approach to funding.

He argued funding reform should look to tackle the unpredictability and fairness of the current levy system.

Neale said: “We should try and find an approach which reduces that unpredictability, perhaps through pre-funding, perhaps by enabling the FSCS to hold modest reserves to provide a buffer against costly failures.

“Businesses understandably do not like paying for the failures of products they would not sell themselves or firms which run much bigger risks than they would.

“So we should try to ensure that costs fall primarily on the sectors of the industry that impose them, perhaps by introducing a risk component to funding or by borrowing.”

Neale also stressed the importance of consumers taking responsibility for their own investment decisions. He said while savers cannot be realistically expected to do due diligence on their bank, they should understand the risks they are running with investment products.

However he said the increasing number of complex investment products meant it was difficult for consumers to understand the risks involved.

He added: “The FSCS offers no protection for risks that have been disclosed but not understood.

“My question is this: should the industry accept that there is no such thing as risk-free investment and instead focus on designing simple products with much more transparent risks?”

The FSCS warned advisers last month that compensation costs in relation to Keydata, Arch cru, MF Global, Wills & Co and other stockbroking firms could push investment intermediation costs above the £100m adviser sub-class limit and trigger a cross-subsidy for fund managers. The FSCS has already levied the investment intermediation sub-class £30m in 2011/12.