The recession has put a lot of pressure on insurance brokers, and the Financial Services Compensation Scheme is about to pile on a whole lot more. With some firms citing levy increases of around 600%, it’s time to say ‘enough is enough’
For some hard-pressed brokers, it could be the straw that breaks the camel’s back, industry lobbyists are warning. They are referring to the explosion in the sums levied by the Financial Services Compensation Scheme (FSCS).
The 2010/11 levy for insurance intermediaries is set to rise to £50.5m – a sixfold increase on the estimated £8.5m sum for 2009/10 (a figure that is due to be confirmed later this month).
On top of that £8.5m for this year, the scheme is asking for an additional £20m to cover claims arising as a result of payment protection insurance (PPI) misselling. The FSCS expects the total number of PPI claims to almost double to around 8,000 during the next year.
PPI claims have been lumped into the investment intermediation (SDO2) sub-class, along with general insurance intermediaries.
In such straightened cicumstances, it is particularly galling for brokers to have to pay for mis-sold policies, the vast majority of which were not even sold by professional brokers but by banks and building societies.
And the tally could rise yet further, with the FSCS warning that the 2010/11 levy could rise above £100m, at which point general insurers would be asked to make a contribution too.
Also looming in the background is the fact that brokers will eventually have to help the FSCS pick up the tab for its £14bn ‘loan’ from the Treasury to cover the costs of the Bradford & Bingley failure. It’s bad news after more bad news where the FSCS?is concerned.
FSCS chief executive Loretta Minghella has acknowledged that the new levies would be “unwelcome news for firms” in the current “tough economic times”.
But just how unwelcome will the proposed fee levels be for individual brokers? Using the scheme’s own web calculator, Biba has worked out that a firm with an eligible claimant income of £3.5m will have to pay an estimated £15,783.
For a company with an income of £7m, that figure rises to £31,527. And for companies
earning £20m, it is around £90,000. None of these figures takes into account the extra £20m the industry has been asked to cough up this year, however.
Biba says that one firm it has been contacted by looks set to see its contribution rise from £3,000 in 2008/09 to £86,000 in 2010/11 (see box).
Given the ongoing recession and soft market, many will find it particularly hard to cover the levy hike.
Former Brokerbility chief executive, Stuart Randall, says: “It’s very difficult because many brokers are feeling the pinch.” He adds that the increases are likely to have a disproportionate effect on smaller firms. “Many brokers are thinking about selling, and any increase in fees is going to accelerate that. Most of them are not destitute, but they are working harder and harder to get less and less.”
Consultant Branko Bjelobaba says that the combination of the increases and the obligation on brokers under the FSA’s threshold condition 4 to maintain adequate capital reserves could push some smaller firms over the edge.
‘We are being hit on all sides’
The final figures for the 2009/10 scheme and the indicative 2010/11 levy are due to be announced later this month.
Without a change in the rules governing the scheme, brokers are pessimistic that they will see any fall in the mooted sums. Efforts therefore are likely to turn to the “fundamental reform” of the FSCS announced in last month’s consultation paper, the details of which have yet to be fleshed out.
Nevertheless, in the meantime the perceived injustice rankles deeply.
IIB chief executive Barbara Bradshaw calls the FSCS’s levy hike an “obsenity”, adding: “Prudent providers can deal with this kind of levy by putting it on their policies, but independent financial advisers can’t do that. It all comes off the bottom line.”
Randall’s successor at Brokerbility, Ian Stutz, says: “We are in a very challenging environment. The economy is shrinking and we are being hit on all sides. We pay our fair share and I don’t think that the contribution we make is unrealistic.
“We’re just looking for something that is fair and just.” IT
Biba’s Steve White on the FSCS levy hike
Biba has been raising its concerns with the funding mechanism of the Financial Services Compensation Scheme (FSCS) since the FSA announced the results of its funding review in November 2007.
These concerns were brought into sharp focus by the banking crisis and the collapse of Bradford & Bingley. The resulting £14bn ‘loan’ to the FSCS will need to be repaid in 2012, and brokers have been nervously keeping a close eye on developments.
And as highlighted in Biba’s 2010 manifesto, the unfairness of the current funding arrangements of the FSCS is a matter that Biba is lobbying to change.
The recently issued FSCS annual plan and budget, plus the FSA’s consultation paper on its fees and levies, has underlined the need for change. The FSCS budget for 2010/11 contains a levy of £50.5m from ‘general insurance intermediaries’, up from £8.5m in 2009/10. Additionally, there is a £20m shortfall for the 2009/10 financial year, for which the FSCS will shortly be issuing a stand-alone demand.
So what are the implications for insurance brokers? There are several well-documented real life examples, including one firm I was speaking with recently. It is a motor broker with a £20m annual commission/fee income. Over the last two years, its contribution to the FSCS had gone from £3,000 in 2008/09, to £16,000 in 2009/10 and for 2010/11, the bill would be £86,000! In addition, the call for the £20m shortfall could land it with a further £35,000 to pay.
This massive increase in the FSCS’s budget is caused by firms that have mis-sold PPI policies (typically firms that have sold mortgages or other loans) being unable to compensate customers and being forced to close. Where this happens, the affected customers are dealt with by the FSCS and the resulting costs passed on to all firms with a permission to undertake general insurance mediation activities.
Biba has no issue with the concept of compensating consumers in the event of a firm failing. However, we should not lose sight of the fact that the current funding arrangements are totally out of line with the rest of Europe – there is no other state in the EU where insurance intermediaries face any element of cross-subsidy.
Biba will be fully engaging with the FSA’s fundamental review of the FSCS and we will be demanding that the general insurance mediation sub-class is restructured to ensure that insurance brokers are better protected from those that have caused the mis-selling problems.
Steve White is regulation and compliance manager at Biba.