Financial Services Compensation Scheme chief executive Mark Neale says the idea of pre-funding the compensation scheme deserves a “fresh look” rather than continuing with the current pay-as-you-go levy system.
Neale (pictured) has started a new industry blog called Perspectives which appears on the FSCS website.
In the first edition, published this morning, Neale acknowledged the unhappiness among financial services firms about the way the scheme is funded.
Neale says: “One inescapable truth is that large parts of the industry are unhappy with the FSCS’ current funding model. Pay-as-you-go levies are unpredictable and difficult to budget for. How could they not be when failure is also unpredictable?”
He also noted firms’ opposition to the current cross-subsidy arrangements which see low risk businesses paying for the mistakes of higher risk firms.
The FSA published a consultation paper on reviewing the FSCS funding model in July, which rejected the idea of a product levy and instead proposed an increase to the annual claims limit paid by investment intermediaries from £100m to £150m.
It also suggested the creation of a retail pool for firms under the Financial Conduct Authority which would be triggered if any class breaches its annual claims limit.
Neale has encouraged advisers and financial services firms to respond to the consultation. He says there is a need to be “open-minded” about how the FSCS distributes compensation costs.
He says: “Would you, for example, prefer to spread the costs of big failures over time rather than horizontally across the industry? If so, we should take a fresh look at pre-funding.
“Pre-funding has drawbacks. It means taking capital out of the industry before FSCS needs it. And the transition to a pre-fund would be tricky.
“But contributions to pre-funds would be predictable and failing businesses would have contributed to the cost of clearing up after them through the pre-fund. There would be no, or much reduced, need for any cross-subsidy between sectors.”
Neale says the idea of linking FSCS costs to the risk firms pose should also be considered, and firms need to feed back to the FSA how this could be achieved.
The FSA’s consultation on reviewing FSCS funding closes on 25 October.