The separate broker fund isn't fair, says Grant Ellis

The FSA papers are now coming thick and fast and it's going to be a challenge to not only keep up, but also to make sure that nothing relevant gets missed in the sheer volume of literature.

Following my first trawl through feedback on CP174 there were a couple of things that jumped out at me. The first relates to the compensation arrangements via the financial services compensation scheme (FSCS) and the related client account and professional indemnity (PI) insurance requirements.

The FSA has decided to have a separate fee block for brokers within the FSCS, which means that brokers will contribute only for claims against the fund made by brokers. Fair enough, you might say, but the problem is that it will only be brokers who contribute to the fund - no one else will be stumping up.

The fund is intended to provide a safety-net for customers in a situation where their broker goes bust leaving them out of pocket. The FSA has decided to reduce the minimum levels of cover for PI insurance to ¤1m (£690,000) for any single claim and, at the same time, has left out any form of compulsory risk transfer.

The combination of these two could have a serious effect on the number and size of claims on the FSCS going forwards.

Currently, if a broker ceases to trade the insurers for whom he has acted will invariably honour any policies written (subject to the client being able to prove that he had paid the premium to the broker of course). It is likely that with the introduction of the FSCS safety-net insurers will no longer adhere to this practice, and the remaining brokers will pick up the tab via the FSCS.

A lower PI limit will further exacerbate pressure on the fund. The FSA argues that research suggests in the small broker market that claims are few in number and small in amount. While I don't doubt the findings, I'm not sure that past performance will be an indicator of future behaviour. Surely one reason for this low frequency is the claimants' view of the brokers' ability to pay?

Claimants - and more importantly perhaps their legal representatives - will now know that in future there is no ceiling on the brokers' ability to pay, as the compensation fund will pick up any shortfall.

I'm convinced that we will see an increase in the frequency and size of claims against brokers going forwards as a result.

Grant Ellis is chief executive of The Broker Network