IIB warns that compensation scheme levy could run into thousands of pounds for each broker

The IIB is warning that brokers could face bills for thousands of pounds each to cover the nationalisation of Bradford & Bingley.

The trade body said brokes face the propsect of a considerable levy for the Financial Service Compensation Scheme which paid £14bn to protect Bradford & Bingley depositors.

The IIB said in a circular to brokers: "The FSA determined on Saturday morning that Bradford & Bingley no longer met the operational threshold conditions to continue trading, so the Financial Services Compensation Scheme (FSCS) was triggered. The FSCS has paid a sum of approximately £14 billion to enable the retail deposits held in Bradford & Bingley to be transferred to Abbey.

"The payout has been financed through a short term loan from the Bank of England. The first interest payment is estimated at £450 million for the first half-year from now until the end of March 2009. This is due for payment at the end of September 2009 and subsequent payments will be made annually thereafter."

The circular added: "The annual aggregate capacity of the FSCS is currently £4.03 billion – this takes into account the ‘general retail pool’ which can be called upon to top-up the ‘class’ contributions. The cost of compensation relating to Bradford and Bingley’s retail customers will fall, initially, on the contributions of other banks in the ‘deposit’ class, which has an annual capacity of £1,840 million. If the ‘deposit class’ is exhausted, the general retail pool – to which all participant firms are required to contribute – comes into effect.

"The implications for insurance brokers and other financial firms in terms of future FSCS levies are considerable. Although there is an annual cap on the compensation levy and the FSCS commitment might be partly offset by some realised securities, it is anticipated that firms’ future contributions to the scheme will be affected.

It continued: "The maximum amount which could be levied from all general insurance intermediaries (including any contribution to the general retail pool) is £195 million for the current year. Levies are based on each firm’s annual earned income figure. The FSA published a table in Policy Statement PS07/19 which indicated, for example, that an insurance intermediary firm with a brokerage income of £500,000 would be liable for a maximum payment for this year of £8817.

"In the meantime, the FSA has introduced a new rule under which a firm would remain liable for compensation payments accruing from the Bradford & Bingley default even if it ceases to be a participant firm."

The IIB has a long track record in criticising the FSCS and has repeatedly called on the Treasury to consider a suitable alternative, especially for insurance intermediaries. While insurers could eventually pass on compensation costs in higher premiums, it has been argued that intermediaries would have more difficulty in trying to recoup their outlay.

Further information on the FSCS issue will be provided as soon as there are any significant developments.