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Sinking fund floated for the FSCS

The FSA is considering proposals to set up a pre-paid emergency compensation fund as part of its review of how to fund the Financial Services Compensation Scheme.

FSCS chief executive Lor- etta Minghella says the industry is looking for a solution to manage the volatility of the existing system to avoid firms being suddenly hit by massive fee increases caused by fluctuations in compen- sation payouts.

IFAs narrowly escaped having to pay an additional levy this year because the 2005/06 levy failed to account for a threefold increase in complaints about endowments.

The shortfall will be carried forward, meaning that advisers in levy block A13 face a rise in fees of 27 per cent in 2006/07.

Minghella believes the system could draw from the example of the US Federal Department Insurance Commission, which has set up a multi-billion-dollar “sinking” fund.

The results of the consultation by Oxera are due for publication in March.

Minghella says: “The current system hits hard on the industry at different times. We need to do something to smooth this volatility. Pre-funding at a modest level might be quite helpful because it can be dipped into if anything goes down.”

But Aifa director general Chris Cummings says: “We understand the need for the compensation scheme to have a small reserve but it is difficult to justify advisers paying a significant amount for claims that may crop up in the future. This money would be better used in helping them improve their businesses.”

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