The FSA has rejected claims by the Investment Management Association that Financial Services Compensation Scheme reform will see banks and insurers ringfenced from paying for retail misselling claims.
The regulator published its consultation paper on reviewing the FSCS funding model today.
The paper sets out plans to separate out funding responsibilities between activities that come under the Prudential Regulation Authority, such as banks, building societies and insurers, and activities under the Financial Conduct Authority, such as advisers and asset managers, with no cross-subsidy between the two.
The regulator has also proposed the creation of a ‘retail pool’ made up of FCA firms which would have to pay claims if one class of FCA firms breaches their annual claims limit.
The IMA says this move will result in fund managers being liable to pay compensation claims from the misselling of insurance and structured products, while the producers of those products would not.
IMA chief executive Richard Saunders (pictured) says: “The FSA’s proposals are shocking and astonishing. These proposals expose different types of firms to completely different liabilities in a totally inequitable way.
“Banks and insurers, which will in future be regulated by the PRA, are looked after in their own scheme with no exposure to cross-subsidy. But fund manufacturers, to be regulated by the FCA, will not only be responsible for compensation arising from the failure of other fund management firms but will also be obliged to stand behind excessive claims from the failure of distributors who missold products of any type.”
Saunders adds separating out PRA firms from the retail pool is “manifest nonsense as they all have a wide range of retail products”.
But speaking to Money Marketing, FSA director of conduct policy Sheila Nicoll says: “Insurers and banks will not be ringfenced because they will be undertaking activities within that pool. They will themselves be acting as intermediaries. Insurers and banks with advice arms will still be contributing to that pool.”
Nicoll says insurers and banks will also still have to contribute to the retail pool where products have been sold on a non-advised basis.
The FSA is also seeking to increase the annual claims limits for different classes as part of the reform plans. If agreed, the annual claims limit will increase from £100m to £150m for investment advisers, but will fall from £270m to £200m for fund managers.
Nicoll says: “We understand the IMA’s arguments and why it is concerned because its members have already paid cross subsidies in the investment intermediation class. At the moment only fund managers would cover the failure of an investment intermediary if the annual limit is breached. In future, those costs will be more widely spread. We hope the pool will not be needed, but we think it is important it is there in order to make sure the FSCS is sustainable.”
Ami chief executive Robert Sinclair says the consultation marks a “watershed” for advisers.
He says: “When anyone holding an authorisation to provide advice recommends a product then not only they, but the rest of the intermediary community, are on the hook both for that product and for that advice. In deciding the product is appropriate and suitable, liability is then established. The loss of shared producer and seller liability is a fundamental shift in policy.”