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FSA dismisses IMA concerns on FSCS cross subsidy

The IMA has slammed the FSA over its “shocking and astonishing” proposals to overhaul FSCS funding

The FSA has rejected claims by the Investment Management Association that reform of the Financial Services Compensation Scheme’s funding model will see banks and insurers ringfenced from paying for retail misselling claims.

Last week, the regulator published its consultation paper on reviewing the FSCS funding model.

The paper sets out plans to divide 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 that would have to pay claims if one class breaches its 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 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 that 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 have to contribute to the retail pool where products have been sold on a non-advised basis.

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.”

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