Compensation schemes such as the Financial Services Compensation Scheme are based on a recognised principle that the majority pay for the failures of the minority, thereby reducing the impact of a failure on individuals.
The existence of the FSCS helps to satisfy the FSA's sta-tutory objectives of maintaining confidence in the sector and providing protection for consumers. Under the sch-eme, firms authorised to conduct business by the FSA pay for the cost of claims against other authorised firms which are unable to pay claims against them.
We at the FSCS can only consider claims if a firm or its principals are unable to pay claims. How claims end up at the scheme's door is outside our jurisdiction. If a firm is in default, the scheme is triggered.
To qualify for compensation, claims against a firm in default must be eligible under the scheme's rules. For inv-estment misselling claims, for example, the FSCS must be satisfied that the product was unsuitable for the investor at the time of sale and that the investor has suffered a loss.
Generally, the aim is to put the investor back in the position they would have been in had they not bought the product. Compensation is not awarded for poor investment performance as such and it is only if all these conditions are met that the FSCS can pay compensation. Many of the potential claims do not fall within our remit and are rejected.
Firms share the costs of compensation according to the types of business they are authorised to conduct and not the products they sell. One of the key features of the scheme is that firms should only pay for claims arising from the type of business they also conduct, for example, advisory brokers holding client money.
The FSCS is funded on a pay-as-you-go basis. Its management expenses are subject to public consultation and it makes levy announcements each spring based on its estimates of the amount of compensation it will be required to pay in that year.
The 2004/05 increases in levies were announced on March 25 and we publish information on our website.
Increases in investment sub-scheme compensation costs being experienced by firms are a direct result of the increase in non-pension rev-iew claims being considered by the scheme, for example, in respect of products such as mortgage endowments and precipice bonds.
The levy for these types of claims increased by 320 per cent from £7.9m in 2003/04 to £33.2m in 2004/05. The levy for pension review (A16) claims fell by 31 per cent.
The FSCS has warned that an additional £20m may be needed for 2004/05 because of the continued escalation of general investment claims.
The scheme aims to defer any further related levies until 2005/06. An announcement of the total levy required for 2005/06 is expected to be made in spring 2005.
Payment of levies is a req-uirement of authorisation by the FSA. For further information about the levy, see www. fsa.gov.uk/fees The FSCS was set up under the Financial Services and Markets Act 2000. It is bound by the terms of FSMA and the rules made for it by the FSA. Regulatory objectives under the FSMA include market con-fidence and the protection of consumers.
The FSCS publishes a regular newsletter for firms called Outlook which is sent to all authorised firms and published on its website. You can register to get a copy by email at www.fscs.org.uk Ron Devlin is interim chief executive of the Financial Services Compensation Scheme