Advisers say moving the Financial Services Compensation Scheme to a pre-funded model could lead to more payouts because the FSCS would have a readily available pot of money.
Last week, FSCS chief executive Mark Neale said the idea of pre-funding deserves a “fresh look”.
In the first edition of his new industry blog Perspectives, published last week, Neale said it is an “inescapable truth” that many firms are unhappy with the FSCS’s current pay-as-you-go levy system.
He said as part of the FSA’s current consultation on FSCS funding reform, there is a need to be open-minded about how the scheme distributes costs.
Neale said: “Would you, for example, prefer to spread the costs of big failures over time rather than horizontally across the industry? If so, we should take a fresh look at pre-funding.
“Pre-funding has drawbacks. It means taking capital out of the industry before FSCS needs it. And the transition to a pre-fund would be tricky.
“But contributions to pre-funds would be predictable and failing businesses would have contributed to the cost of clearing up after them through the pre-fund. There would be no, or much reduced, need for any cross-subsidy between sectors.”
But ValidPath director and financial planner Kevin Moss says: “The underlying nature of the FSCS is that whenever there is a need for extra cash, it can just dip its hands in your pockets. Pre-funding would almost exacerbate the problem because if the FSCS thinks it has got the money it will spend it.”
Philip J Milton & Company managing director Philip Milton says: “Pre-funding might make it more likely to agree compensation claims because the FSCS would have a pot of money from which to pay out. It would be better if the FSCS was less hasty at paying out in the first place.”