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IMA attacks ‘unfair’ FSCS cross-subsidy proposals

Fund management trade body reiterates concerns about cross-subsidy and urges FSA to make all product providers equal.

By Nick Reeve | Published Sep 06, 2012 | comments

The IMA has hit out at the FSA’s proposal to revamp the FSCS funding regime, saying it does not treat all product providers equally.

The fund management trade body has repeatedly warned the FSA and politicians that, under the new regulators, the FSCS would be split, meaning an unfair liability on fund managers.

The splitting of the scheme - according to companies regulated by the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) - has caused the IMA to fear that compensation relating to mis-selling of bank products by intermediaries will not be subsidised by banks, but by fund managers.

In a proposal circulated to members, the IMA said: “Banks and insurers face no potential liability in the event of mis-selling of their products by an intermediary. They are only liable in the event of default by another bank or insurer.

“In contrast, fund managers are both responsible for funding of defaults by other fund managers and potentially liable for mis-selling of [bank] products by intermediaries if the relevant cap is exceeded in any year.”

Instead, the IMA wants banks and insurers to contribute to a general cross-subsidy pool to reflect the fact they will be supervised by the FCA for conduct of business purposes.

The trade body said it will also lobby the FSA to give the FSCS greater borrowing powers to reduce the risk of cross-subsidy from one levy pool to another.

Fund managers were hit with a combined bill of more than £200m in January 2010 to help fund the FSCS’s compensation of Keydata investors. This was after advisers were billed for £100m in that year’s levy.

Last month the FSA proposed changes to the FSCS funding rules, increasing the limit on how much can be charged to investment intermediaries in any one year from £100m to £150m, while reducing the limit for fund managers.

However, it also split the scheme between firms which will be covered by the FCA and those covered by the PRA, which come into existence next year.

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