Fund FSCS from products, says IIB

The IIB is calling on the Financial Services Compensation Scheme (FSCS) to be funded by charges included in the pricing of insurance products.

The trade association has rejected the four proposed funding models put forward by the FSA in a recent consultation paper.

It argues the proposals could cripple brokers as they would be unable to pass on the cost of FSCS levies to customers "unlike insurers who factor the cost into premium/product pricing".

IIB director general Andrew Paddick said in a letter to members: "Unless the FSCS is totally funded out of charges included in product pricing (such as insurance premium tax) there are always going to be arguments about cross subsidisation, unfairness and affordability."

Paddick said consumers would "understand that they are paying a small supplement for additional protection in the event of failures, and the charge provides a tangible measure regarding the effectiveness of FSA regulation".

The FSA has proposed four models for the future funding of the FSCS in its review.

These are based on dividing the financial services sector into a number of broad classes of which general insurance is one.

Firms' levies would be based on the compensation costs attributed to each class, although there is provision for a 'general pool' contributed to by all firms when losses in a single class reach a certain "catastrophe" level.

In two of the proposed models, the classes are sub-divided further into intermediaries and insurance companies.

Paddick said: "Raising the funds required by the FSCS from product levies is not an option considered in the FSA discussion paper and is something we would like to see properly evaluated in-depth and presented as an additional option in the forthcoming consultation document."

At present the FSCS, which compensates policyholders when financial services firms collapse, is funded by levies on companies.

These levies will cover expected compensation cost outgoings in the coming 12 month period. The levy on firms is linked to the size and nature of the business.

Biba regulation and compliance manager Steve White said in principle the IIB's proposal "may have some merit".

He said: "Any sensible, practical solution is worth considering."

The ABI said in March that it did not want its members to contribute to levies arising from the collapse of brokers.

Biba said it would strongly argue that its members should not contribute to the failure of insurance companies.