FSCS reform – trick or treat?

Halloween – the time when ghosts and ghouls supposedly walk the earth.

If you survived last night’s terrors, there are potentially more to come. Equally scary for the industry, but less well observed, was yesterday’s meeting of the Financial Services Authority’s board which considered a policy statement relating to the funding review of the Financial Services Compensation Scheme.

That statement will provide feedback on comments received about consultation paper 07/5 which aimed to address concerns about the way the FSCS is funded, particularly with regards to its robustness and fairness. The CP itself has proven tremendously unpopular giving rise to energetic debate across the financial services market not only about the nature of reform, but more importantly from a business perspective where the FSA will set contribution thresholds for different industry sectors and sub-classes.

Throughout these discussions BIBA has sought to ensure that the scope of the FSCS is properly limited and that the likelihood of a significant call on the general insurance intermediary sector is remote. BIBA has vigorously contested, with some success, initial proposals in CP07/5 which raised the prospect of a substantial call on our sector.

Revised funding levels for the general insurance sub-class still concern us; our research shows that the risk of intermediary failure is but 1/1000 of that of an insurer and we believe the tariff base used to set the threshold for intermediaries fails to take that into account.

There’s no doubting that the FSCS is a vital regulatory safety net providing protection for customers. Yet with no European wide requirement for an FSCS like scheme, or standardised levels of compensation, you can’t help but feel that business in the UK is being put at a commercial disadvantage.

Recent events at the Northern Rock suggest that the current framework for depositor protection may not uphold the public’s confidence adequately. The Chancellor has published a discussion paper to improve the framework for dealing with banks in distress, including the arrangements for depositor protection. Given that the current funding reform proposals for the FSCS also introduce an element of cross subsidy any further changes to depositor compensation should be of interest to us all.

Might it not be wise to wait a little longer before introducing the funding reforms suggested in CP07/5 to allow this latest round of discussions to reach fruition? That way if there are any further changes required to FSCS we can make them all at the same time.

All we can do for the moment is to wait for publication of the statement, which will be next week if the FSA board approves the document. Hopefully, sense will prevail. As always, the devil will be in the detail.