FSA proposes new FSCS exit levy
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The FSA has proposed new rules that would allow the Financial Services Compensation Scheme to impose an exit levy on firms that leave a particular deposit class but continue operating in another.
The FSA’s quarterly consultation says that existing rules only apply an exit levy when a firm ceases to be an FSCS participant firm.
The FSA says: “Therefore, where a firm, for instance, exits the deposit class but continues to carry on other activities covered by the FSCS, it will remain an FSCS participant firm and so avoid paying an exit levy in respect of exiting that class.
“Under our proposal firms that cease to carry out activities in a particular class or sub-class will be subject to an exit levy.”
The FSA is also proposing a U-turn on changes it made in 2008, when it extended the FSCS’s powers to charge an exit levy for firms leaving the market.
Prior to 2008 the FSCS could only levy for anticipated expenses in the year following the exit, but the FSA changed the rule without consultation to give the FSCS the right to raise exit levies for expenses incurred or expected to be incurred at any time in the future for existing defaults.
The FSA says the rule change has had an unintended consequence and it is proposing to restrict the FSCS’s right to raise an exit levy for anticipated compensation and management expenses for the FSCS levy year in which the firm exits the scheme.
It says the rules introduced in 2008 have the potential to undermine the FSA’s interpretation of the accounting treatment of FSCS levies.
It says: “Currently firms need only accrue for liabilities incurred up to the balance sheet date, which is 12–18 months.
“Because the FSCS can raise an exit levy at any time in the future, this interpretation could be undermined and firms could be required to accrue for their total known share of FSCS liabilities, including the £20bn borrowed by the FSCS to cover the failures in the deposit class. We do not believe this is an appropriate outcome.”
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Readers' comments (7)
Phil Castle | 7 Jul 2010 1:00 pm
Has this been thought through
On initial reading I thought "that sounds a good idea", but if you think it through logically, while there would eb an argument for paying an exit fee when a business is wound up (because any complaints would miss the FOS and go to the FSCS), the argument for an exit fee when leaving a levy group is not as sound as if a complaint about the firm itself came up, it would still be in business so claims would be enforced against the compant via FOS if upheld so the only reason the firm which had stopped doing business would pay would be for other firms failures during which did not come to light while they were trading in that market. If the FSA follow through with this, then it would make more sense to have different businesses for each FSCS levy group, a bit like teh difference between OEICS and Unit Trusts and the risk of cross contamination if the latter fails rather than the former. I increasingley wonder if the FSA just is incompetent/doesn't think of these issues, or they have an agenda and simply put out consultations in order to justify their later decisions.... and blame it on us if we don't think/mention the errors in their ideas and even if we do highlight them, they are not published in the consultation papers, they take extracts to suit their purposes and just list you as a respondent rather than what you actually highlighted to them....
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terry | 7 Jul 2010 1:32 pm
So it comes to light once again that the FSA made an important decision without consultation. Why does this not surprise me. They treat us like mushrooms/ keep us in the dark and feed us loads of doo doo. This was the only words I could think of without offending people of a nervous disposition
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Mike Fenwick | 7 Jul 2010 4:25 pm
Headline: FSA introduce a 1 year long stop!
Yep, for me that is one of two surprising elements arising from this consultation.
The second has a bearing on the controversy over Keydata.
Let's start with the long stop issue.
This is why the FSA did what they did in 2008 - an extract from the consultation:
"Following the deposit taker defaults in 2008 we changed the rule (FEES 6.7.6R) without consultation to give the FSCS the right to raise exit levies against a firm the purpose of meeting its expenses incurred or expected to be incurred, at any time in the future in respect of defaults which had already occurred. At the time we felt that by widening the exit levy rules, we would avoid the incentive otherwise created for firms to exit the FSCS and avoid contributing to the costs relating to the 2008 defaults."
It's what is called "Regulatory Arbitrage", and inho it is something a regulator should be very aware of, and act accordingly - in fact, act just as they did.
However, what is now proposed is, again an extract from the consultation, is:
"We propose a change to the amendments introduced to FEES 6.7.6R in 2008 to restrict the FSCS’s right to raise an exit levy for anticipated compensation and/or management expenses in respect of the FSCS levy year (April 1 to March 31) in which the firm exits the scheme."
So there you have it, folks - the 1 year long stop!
Interesting, or what?
Now, let's fit Keydata into the picture. Again using an extract from the consultation:
"Although we recognise that where a large deposit taker exits the impact on remaining firms would be significant, we believe that the risk of a large EEA deposit taker exiting is small. Also, where a small deposit taker exits we believe the cost to remaining firms would be minimal."
So the FSA made the first change related to deposit takers, and now are changing back - again from a perspective of deposit taking.
However, the consultation does remind us of this:
"The FSCS classes in Fees 6 Annex 3 are made up of deposits, life and pensions, investment, general insurance, and home finance. With the exception of the deposit class, each broad class is divided into two sub-classes based on provider or intermediation activities."
So, it may just be me, but given the Keydata controversy, where the FSA classify the firm as one thing, and the FSCS decide entirley differently, it gives me cause for concern.
What if the FSCS decide sometime in the future in a manner not unlike Keydata, that the funding falls to be paid by a class not related to the FSA's permission - and there has been an early escape by some who took adavantage of the 1 year long stop .... etc.
Interesting or what?
PS: The FSA seem to conclude that there is little risk of a major Bank default. I think they may not have noticed a recent ECB report suggesting potentially two such worries, and why not wait until the current EU inspired Bank stress tests were finished before reaching any conclusion.
Interesting or what?
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Exasperated me | 7 Jul 2010 5:12 pm
If I was DG at AIFA I would appoint Mike Fenwick as policy adviser, sooth sayer, medicine man and witch doctor.
There, there, is that better?
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Phil Castle | 7 Jul 2010 5:30 pm
Mike Fenwick could do a lot for AIFA.....
Looking at the 1 year longstop issue, that has been the case for a limited company unlike a sole trader or partnership since FSMA 2000 hasn't it? i.e. if a Ltd company applies to be deauthorised and has no outstanding complaints, the FSA should approve it, the company is dissolved and no value exisit for complainents to pursue via the FOS and complaints have to go to the FSCS instead (one reason why phoenixing is so immoral and the failure of the FSA to police reauthorisation of senior authorised persons
in phoenixed firms is so deplorable). If hoewever we are talking sole traders/partners, it does not matter that the firm chooses to deauthorise as the FSCS being a scheme of last result expects the sole trader evenm on their death bed to pay out claims if FOS uphold.
I know I bang on a lot about the longstop, but ironically it isn't actually that bad for me as my firm IS a Ltd company, just I cannot in all good conscience sit back and let sole traders and partners be treated so badly, hence why I support Adviser Alliance and have previously supported IFADU.
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Mike Fenwick | 7 Jul 2010 6:13 pm
@ Phil Castle ...
Could your current understanding ever change?
Well, be aware that in an earlier FSA Feedback Statement - they make mention of something called "LRB".
Heard of it - nope, didn't think so.
It stands for "Leaving resources behind". Here is an extract from what the FSA said:
"In Feedback Statement 08/26 we said that we would look to the development of
appropriate mechanisms whereby firms that cease to be authorised have
arrangements in place so that they bear more of the costs of their customers’
subsequent claims than is currently the case.
Therefore we are taking the opportunity
to consider developing, for PIFs, rules on leaving resources behind (LRB) to meet
some of these costs."
PIF's = Personal Investment Firms.
Now afaik nothing has since happened, nor has there been a formal consultation, again afaik, but when ideas are floated like this, sometimes they happen.
So a 1 year long stop for some even if they don't have a clean sheet, but for others even if you do leave with a clean sheet, the FSA may decide that you may have to leave money in the kitty - just for safety's sake
Anomalous, huh?
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Evan Owen | 7 Jul 2010 8:41 pm
I think someone sitting in my chair right now pointed out that LRB was unworkable, HMRC have the first call when a company is wound up, the local authority also want their pound of flesh for LTC (not where you live Mike!), how can you earmark funds for incalculable compensation which may never be needed??
Why is it that you and I can see the problems and the solutions yet all the generously remunerated and compensated legislators, politicians and regulators appear to be myopic?
I have a dream.... and that is all it is, unfortunately.
Anyway, this latest proposal is another stab in the dark which is doomed to failure but will the person, or persons, who conjured it up appreciate being shown up? No they won't but I hope they take note of what justifiably opinionated observers say. What say you Hector? More dead wood for the bonfire of the vanities?
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