FSCS chief invites suggestions for ‘fairer’ funding model

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Financial Services Compensation Scheme chief executive Mark Neale has invited firms to submit suggestions for “fairer” alternatives to the lifeboat scheme’s funding model.

In his latest blog post on the FSCS website, Neale says he recently received a call from an IFA who expressed “anger” that he was having to fund the rising cost of Sipp claims despite not being authorised to advise on long-term insurance products.

In April, the FSCS announced that the 2015/16 levy for life and pensions intermediaries would almost double from an expected £57m to £100m.

The news came after life and pensions advisers were hit with a £20m interim levy in March.

Neale says: “Other comment was more restrained, but reflected the same frustration that businesses with low risk business models were, as they saw it, bailing out much riskier firms. The ‘blameless’ were picking up the bill for the blameworthy.

“I understand this frustration and it concerns me. Industry support for FSCS is put at risk if there is a perception that our funding arrangements are unfair.”

He says alternative means of distributing the FSCS’s costs include fragmenting the existing funding classes to reflect firms’ different business models.

But he says: “We have previously concluded that the FSCS’ funding – and security for consumers – is better secured by pooling costs across wider, deeper pools. Narrow, shallow pools are much more vulnerable to big failures.”

Neale says: “A more promising approach may be to retain the current classes, but adjust the underlying levy base to reflect risk.”

Currently, the levy base reflects firms’ share of the relevant business.

Neale says that to change it, the FSCS would need to find “objective and transparent” measures of risk which genuinely correlate to the risk of firms’ failing and claims against them falling on the FSCS.

He says: “This is where firms themselves – and their trade bodies – can play an important part. If you think the principle of risk-based levies is right, please help the regulators and FSCS to identify fair ways of capturing risk in the allocation of levies.

“You can help us to shape a better funding system if you get involved.

“This is, moreover, the right time to do it because the FSCS’ funding review, led the by the regulators, is about to get under way.

“So if you think the current arrangements are unfair, please tell us what would be fairer.”