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FSA ups FSCS capacity to £4.03bn

The FSA has confirmed the future funding arrangements for the Financial Services Compensation Scheme, which will operate from 1 April 2008.

The regulator says the new funding model expands the overall financial capacity of the scheme up to a maximum of £4.03bn per year.

The scheme will be divided into five broad classes including life and pensions, investments, general insurance, deposits and home finance. Each class, except deposits, will have two sub-classes and above these would be a general retail pool.

The FSA says the initial tranche of costs will fall to the relevant sub-class, the next to the relevant broad class and then finally above that to a general retail pool. This last level of funding is only expected to be triggered in the event of a significant default, or series of defaults.

The regulator says the new funding system will considerably increase the funding available to pay valid claims to consumers and will promote greater consumer protection and help maintain market confidence through financial stability.

It also says the system will apportion the cost of compensation between regulated firms as fairly as possible and will be simpler to administer.

FSA director Graeme Ashley-Fenn says an effective system for compensating consumers for losses incurred when a financial services company fails is a vital part of the regulatory system.

He says: “The new model is more rational, fairer to the various players in the market and provides greater levels of funding. It will be capable of meeting current issues, such as endowment mis-selling and will now also provide compensation for any future potential, and unexpected, claims.

“Notwithstanding recent market developments, we feel it right to continue with the new and improved FSCS funding model. Recent experience shows how much improvements are needed. Further changes may be made to the FSCS arising from HM Government and other initiatives. These do not remove the need to improve the scheme now, but will supplement the improvements being made.”


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