IIB wants a cap on unlimited FSCS compensation limit

The Institute of Insurance Brokers has voiced strong opposition to unlimited compensation awards.

The statement comes as part of its response to the FSA consultation - CP08/15 Financial Services Compensation Scheme: review of limits.

Under the FSA proposals, individual compensation limits for deposits, investments and home finance will be set at £50,000. Insurance customers, however, will have 100% protection for compulsory classes (such as motor and employers’ liability) and 90% protection for other classes of insurance with no upper limit.

Ann Peel, IIB head of Technical Services said that the sustainability of any scheme which offers unlimited guarantees to customers has to be questioned. “We are urging the FSA to place a cap on awards for insurance mediation. Unlimited compensation is a relic of the old Policyholders Protection Act, which was there in case an insurance company failed. Insufficient thought has been given to the position of brokers and other insurance intermediaries," she said.

The IIB said with the minimum professional indemnity insurance (PII) requirement for insurance intermediation at EUR1m per claim and EUR1.5m in the aggregate, the FSA rules enable customers to secure much greater amounts of compensation from the FSCS should the firm fail.

“As it stands the scheme seems to provide a curious form of excess of loss protection," Peel added.

The IIb said insurers can factor FSCS levies into their pricing but intermediaries are not in a position, generally, to pass on levy costs to their customers at the point of sale. The costs impact directly on firms’ financial resources and may threaten their viability. It warned that if this year’s compensation threshold for GI intermediation of £195m is reached, a firm with a regulated income of £1m will be expected to pay a levy over £17,000.

Barbara Bradshaw, IIB chief executive, said: “This huge burden, which lies at the door of innocent and prudent firms, can only increase if the arbitrary FSCS thresholds are insufficient.

“Andrew Paddick, the former IIB Director General, advocated that the compensation scheme for insurance should be funded out of product levies. That would be far more transparent for consumers. I would like to see alternatives to the current FSCS model being explored. In the meantime, there is a strong case for limiting compensation payments in respect of GI intermediation.”

The IIB added that a £50,000 limit would be compatible with the proposed limits for financial advice. Alternatively, the IIB believes a limit should be set which is commensurate with the required levels of PII cover as required under the Insurance Mediation Directive.