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Call to base FSCS levies on risk

The House of Lords economic affairs committee has branded Financial Services Compensation Scheme levies “unfair” and called for calculations to be based on firms’ levels of risk.

In its Banking Supervision and Regulation report, published this week, the committee says that while it is impossible to accurately measure the risk of bank portfolios, calculating levies on the basis of the size of an institution rather than its risk profile is problematic.

The report states: “Some ineq-uity in the levies charged by the Financial Services Compensation Scheme is inevitable. The current scheme is nevertheless clearly unfair to institutions which, like the building societies, are constrained from the riskiest business. It is also a potential source of destabilising moral hazard.

“The Government should promote changes to ensure that contributions to the FSCS should be at least broadly related to the riskiness of the business in which regulated firms engage.”

Investment advisers have been hit by a huge increase in FSCS levies, which rose to £44m this year from £9m last year.

Investment advisers also had to pay an additional interim levy of £40m because of the default of stockbroker Pacific Continental Securities.

The committee is calling for the Government to move tow-ards pre-funding of the FSCS “as soon as practicable”.

The report says: “A pre-fun-ded deposit insurance scheme would have a counter-cyclical effect – money levied in boom times would be returned to the banking sector during times of financial fragility. It would also increase depositor confidence.”

Baronworth director Colin Jackson says calculating FSCS levies based on risk is the only way forward.

He says: “Why should I pay levies based on the same calculation as a bank that has been reckless? For advisory firms who act for high-net-worth clients, the levy will be higher than for execution-only firms but overall that is the only way to make the calculation fair.”

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