The FSA is promising to review the FSCS funding model. But that doesn’t mean there’ll be any change in what you pay
The Financial Services Compensation Scheme (FSCS) until now has had only a limited impact on general insurance brokers. However, unless we act now to change the hearts and minds of policymakers, that’s all about to change – and how!
Intended to provide a safety net for those who were denied legitimate compensation as a result of the financial failure of regulated firms (be they banks, insurers or intermediaries), the FSCS has been fairly low on most broker’s agendas – simply because of the relatively small levies that were imposed. For example, in 2008/09 the levy for the whole intermediary population was just £1.6m.
However, it has suddenly taken on a whole new significance with the 2010/11 levy set at a whopping £61m, some 38 times higher. This is mainly down to the hike in the number of payment protection insurance (PPI) mis-selling claims handled by the FSCS, particularly claims against single-premium policies that the FSA outlawed a while ago.
These were largely sold by credit brokers who have since closed their doors, leaving the FSCS to pick up the tab. And when it comes to the number of PPI complainants that are likely to materialise, we’ve barely scratched the surface. The Financial Ombudsman Service’s recently issued annual report shows a 58% year-on-year increase in PPI complaints (49,196 in the year ended 31 March 2010), with 89% of these upheld. Clearly there is a lot worse to come.
I also have to question the FSA’s timing. Let’s face it, the issue of inappropriately sold PPI cover has been around for a very long time – we all knew what was going on, so why did it take the FSA so long to get its act together? Another argument for an ‘insurance tsar’ to regulate our industry.
Thankfully, the FSCS levy does have a cap and is set at £195m in any one year for insurance intermediation. The evidence suggests that this will be the level of funding that we’ll be expected to stump up for many years to come, unless something changes.
The financial impact on an individual firm depends upon its level of ‘qualifying premium’. However, in broad terms, if your qualifying premium is, say, £3m then you can expect an annual levy from 2011/12 of around £11,000 each year for the foreseeable future, just to cover the PPI position.
Every insurance broker I’ve talked to about this is indignant about the inequitable nature of the levy. Most, if not nearly all, have never sold a single-premium PPI policy to anyone – in fact, very few insurance brokers sell payment protection insurance of any type.
The FSA has already agreed to review the FSCS funding model and hopes to issue a consultation paper by the end of the year. This is a golden opportunity to get our point across and press for a separate designation of insurance broker, away from other ‘secondary’ players.
However, be warned: this review will only address how compensation is funded, and not the current limits.
And even if it is changed, any new rules won’t apply until April 2012. So we seem to be stuck with the likelihood of a substantial levy for at least one year. Not very fair, is it? IT
Grant Ellis is chairman of Broker Network Group.
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