IIB argues brokers taking credit cards should be able to claim against FSCS

The IIB is poised to begin a test case against the Financial Services Compensation Scheme (FSCS) concerning credit card payments to brokers .

The case would seek to clarify whether brokers who accepted payments by credit card would be able claim against the FSCS if an insurance company subsequently went into liquidation.

The issue arises from the collapse of Independent Insurance. Policyholders who had paid by credit card were advised by the FSCS to reclaim the money from the card issuer, which in turn sought to claw back the money from the brokers. Brokers were later advised that they would not be able to pursue Independent or the FSCS to recover the debt.

The IIB is arguing that the brokers should be able to claim against the FSCS, and part of its argument is based on an admission by the joint provisional liquidator for Independent Insurance, Dan Schwarzmann. He wrote to the IIB saying that even if policyholders had received the premium back from their card issuer, they were still unsecured creditors of Independent.

In such cases, he said, brokers with a satisfactory assignment of debt from the policyholder could claim for a return of the premium, and Independent would recognise the broker as the payee of the debt.

IIB director general Andrew Paddick said: "The eventual dividend that unsecured creditors will receive will be small. We want the deeds of assignment to apply to the FSCS, enabling brokers to claim where policyholders would otherwise be able to apply for compensation."

Paddick said the IIB had been "exchanging legal letters" with the FSCS, but will bring a test case if the issue cannot be resolved. "This is a matter of great importance, as otherwise brokers should not take credit cards," he said.

A spokeswoman for the FSCS said that it was considering the IIB's arguments.