Broking sector calls for an end to cross-subsidisation on FSCS compensation arrangements

Brokers were celebrating this week after the FSA agreed to review contentious legislation that would leave them liable to pay compensation if a bank went bust.

The Financial Services Compensation Scheme (FSCS), which has been widely criticised in the broking market in recent years, will be the subject of a “fundamental review” by the FSA, which is due to begin later this year.

The FSA confirmed formal details of the review at a meeting with Biba last week, following months of lobbying in which it claimed the broker funding and fees for the FSCS are “unfair and do not properly reflect the low-risk nature of general insurance intermediation”.

An FSA spokesman said plans to review the FSCS were originally announced in June in its submissions to the Treasury Select Committee. The FSA hopes to publish a consultation on the review in 2010/2011, when new rules could be made for brokers and other financial services firms.

The FSA is expected to review the funding model of the scheme, including the composition of classes and sub-classes, the annual thresholds each class can be asked to pay, the allocation of levies among different types of businesses, and the limits that apply to different types of FSCS levy.

It is hoped that the UK’s compensation arrangements will be put on par with the rest of Europe, which does not carry cross-subsidisation.

“The UK is out of step with the rest of Europe,” said Biba’s head of compliance and training, Steve White. “The broking sector is very unhappy with cross-subsidisation full stop.”

Biba chief executive Eric Galbraith added: “I am delighted that a review has been confirmed. We have been calling for changes to the funding of the FSCS and the way in which costs are allocated to various classes of regulated activity.

“It is madness that brokers are potentially expected to fund compensation in the event of big banking failures such as Bradford & Bingley, and I hope that this review will address this important issue.”

A timetable for the review has yet to be decided, but a discussion paper may be created, for which brokers will be urged to give responses. IIB’s chief executive, Barbara Bradshaw, said it was a good opportunity for brokers to be separated from banks.

She added: “It might be something that we [and Biba] can possibly talk about working together on.”

See analysis: 'Its about time'