Spare a thought for the poor FSCS

Since the banking and economic crisis ensued in 2008, the Financial Services Compensation Scheme continues along a turbulent path. On 1 April 2012, Lawrence Churchill will become the new chairman of the FSCS board, succeeding David Hall who passes the mantle across after six years in post. This is an interesting juncture to take stock on the FSCS as it meets challenges ahead.

Incoming chairman Mr Churchill has his eyes wide open and is astute to the tasks ahead. He said: “A huge increase in claims and compensation paid out in more recent years has created significant challenges for the FSCS, and has impacted on all of its stakeholders.”

His central objective is to ensure the FSCS maintains its ‘vital’ role in supporting consumer confidence and for the end-user to be fully appraised of the protection offered by FSCS.

Mr Churchill knows only too well the challenges of managing factions and delivering optimal outcomes across diverse stakeholder groups as he is currently the chairman of the National Employment Savings Trust and was previously chairman of the Pension Protection Fund. He has also held some senior roles in insurance.

His appointment was not the only change at the FSCS. Paul Stockton, group finance director Rathbone Brothers, was recently elected to the board. Rathbone led a band of eight wealth management companies who demanded an independent inquiry into the collapse of Keydata after facing steep FSCS interim levy bills. Mr Stockton and Mr Churchill bring serious industry credibility and backbone to FSCS’s top team.

The FSCS is an independent body set up under the Financial Services and Markets Act 2000 and the UK’s statutory fund of last resort to pay compensation to customers of financial services firms that are unable, or unlikely to be able to pay claims against them. There are limits to the amounts FSCS can levy in a financial year with a maximum of £4bn. The funding is divided into the following key product groupings:

* Deposits – £1.8bn.

* Life and pension – £790m.

* General insurance – £970m.

* Investments – £370m.

* Home finance – £130m.

Any costs exceeding these thresholds for each class trigger the general retail pool under the ‘widening circle’ of funding, but they are triggered in the event of significant default or series of defaults. In the past couple of years FSCS resources have been repeatedly strained by the economic crisis impacting on different product groupings with some high-profile industry collapses necessitating additional ‘interim levies’ in addition to the annual levy determined in February each year.

Of course there is an inherent volatility and uncertainty to these calculations but the FSCS is acutely aware of the collateral damage with the scale of levies with its unknown, if not unanticipated, additional interim element. The FSCS supplemented its confirmed 2011/2012 levy of £217m by an extra £80m interim levy on investment intermediaries, due mainly to the collapse of SLS-backed Keydata policies. The scandal dominated the FSCS’s work during 2010/2011 and costs are estimated at £247m with more than 27,000 claims.