Biba has expressed concern that its members may be forced to help compensate the customers of Northern Rock
The British Insurance Brokers’ Association has expressed concern that its members may be forced to help compensate the customers of Northern Rock, were the bank allowed to default, under new funding arrangements for the Financial Services Compensation Scheme.
Last week, the Financial Services Authority confirmed future funding arrangements for the FSCS which expanded the overall capacity of the scheme up to a maximum of £4.03bn per year. For general insurance intermediaries that level is £195m, a significant increase on previous funding requirements for the FSCS.
Biba said it believes that this level is disproportionate in comparison with insurance company threshold and does not reflect the risk that the failure of an intermediary poses to the scheme or the inability of the intermediary to pass on these costs in the same way insurers or others may be able to do so.
The new funding model creates a catastrophe pool once a particular sub-class has been exhausted. It is this change that exposes general insurance intermediaries to the potential to compensate the customers of failed institutions in other parts of the financial services sector.
It is this cross subsidy that concerns the association, which has been lobbying to minimise the impact of these changes for its members.
Eric Galbraith, BIBA’s chief executive, said: “We are very disappointed at the outcome of what has been a very lengthy and detailed consultation process on FSCS funding reform.
“If Northern Rock were in default and the loss big enough to breach the contribution threshold for the depositors’ class, then the rest of the industry would be called on to compensate that bank’s customers. You would have small insurance brokers bailing out what is one of the UK’s largest mortgage lenders, it just doesn’t seem right.”
Alistair Darling, Chancellor of the Exchequer, gave a statement to the House of Commons yesterday updating MPs about the current position with regards to Northern Rock.
The Chancellor told the House that he was not prepared to rush through legislation for a new regime to protect bank depositors.
Galbraith said: “I can appreciate the Chancellor taking the time to get this vital piece of consumer protection right, but he also has the potential to make substantial savings were Northern Rock unable to meet its liabilities post 1 April 2008, as he would be able to draw on the FSCS. A delay would certainly work to the Government’s advantage.”
