FSCS review intended to make scheme fairer could see brokers paying higher levies

Steve White, Biba

Biba has pledged to fight the FSA’s planned changes to the Financial Services Compensation Scheme  (FSCS) that could see brokers paying more in levies.

The FSCS compensates customers if financial firms go bust. At the moment, if claims made against one financial services class break a set threshold, firms in other classes pick up the rest of the bill.

The regulator agreed to review the FSCS after Biba, other trade bodies and Insurance Times argued that the arrangement was unfair.
Now the FSA has published a consultation paper on changing the FSCS, but many of the proposed changes will leave brokers in a worse position than before.

The main change for brokers is the planned increase of the financial cap on the general insurance intermediary subclass by more than 50%, from £195m to £300m per year.

This cap level would be the highest for all financial intermediaries, and the £105m increase is the highest of all planned threshold hikes. This means that general insurance intermediaries would pay the most if claims overspilt the cap levels of other classes.

It also means that general insurance intermediaries would have to pay the most for claims in their own class before other classes stepped in.

The FSA paper said the £300m threshold would lead to 3.2% of firms in the insurance intermediation class becoming unprofitable, compared to 2.1% at the moment.

Biba head of compliance and training Steve White said that Biba was disappointed with some of the FSA’s suggestions, but that the trade body would keep fighting for a fairer system for brokers.

He said: “This is a consultation, and we are going to be actively engaged in the consultation paper. We have lawyers and consultants lined up to work for us.”

White singled out the cap increase as a big campaigning issue for Biba. “The biggest levy they have raised on our sector in any 12-month period is £69m,” he said, “which would suggest that there is absolutely no problem with a cap of £195m.”

FSA director, conduct policy, Sheila Nicoll said that the increased cap reflected brokers’ ability to pay.

She said: “The intention is that the thresholds should only be triggered in exceptional circumstances.”

Nicoll added that all the FSA’s planned changes were up for debate.

The consultation will run until s25 October 2012.

Talking points …

● Is the FSA really likely to change its plans, considering it has already refuted many of the suggestions made to it?

● Will insurance brokers end up paying for others’ failures if the FSA creates its planned retail pool?

Pass notes: The FSCS

What other changes are in the FSA consultation paper?
The FSA also plans to introduce a “retail pool”, which would see brokers exposed to claims made against other intermediaries, and is ring-fenced from banks and insurers. It also wants to make FSCS levies more predictable by planning them to run across three years, rather than rebudgeting every year.

What FSCS changes have Biba and Insurance Times campaigned for?
Biba wants the FSCS to ring-fence insurance brokers from the rest of the insurance intermediation sub-class. It also wants the current cross-subsidy structure to end. Insurance Times’s main points are ring-fencing for brokers and fairer fees and levies.

Why won’t the FSA ring-fence brokers?
The regulator said that it would be difficult to legally define a firm’s main business activity, and could also lead to firms being lumped into the wrong class.