The Financial Services Authority will go through with the plans to force providers to contribute to the new Financial Services Compensation Scheme ‘retail pool’ where other classes have reached their thresholds, despite claims from insurers and banks that the new structure is ‘unreasonable’.
In a policy statement published today (25 March), the FSA revealed that some providers protested proposals which would require them to contribute where another retail sub-class category reached a certain levy threshold.
Under the proposals the four intermediation sub-classes and the ‘investment provision’ sub-classes covering fund managers and others would contribute to a £790m retail pool, which would make payments if one of the classes reached its respective threshold.
The plans were revised in January such that providers, including insurers and banks, would have to make contributions in such cases despite not being able to draw on the pool. This, the FSA said, would ensure they made a fair contribution given their influence on the sector.
Responding to the one-month long consultation on the changes a number of insurers and banks complained it would be “unreasonable that they should be required to contribute to costs generated by firms with which they believe they have no affinity”.
Providers also argued that the proposals would distort their “risk management incentives and responsibilities” with respect to the intermediaries they use to distribute their products.
However, the FSA argued that the FSCS must be able to compensate consumers even when the costs exceed affordability thresholds.
Other suggestions for sources of funding included commercial borrowing and allowing for some contributions to be clawed back in easier years.
The FSA said: “We acknowledge the strength of feeling in the responses we received, but we were not persuaded that the proposed model does not strike a reasonable balance between extending the funding capacity of the scheme while ensuring that no sector is threatened by potentially unaffordable levies.”
Chris Hannant, policy director at advisory trade body the Association of Professional Financial Advisers, welcomed the move, but criticised the FSA for not backing down on plans to increase the investment intermediary sub-class threshold by 50 per cent to £150m.
He said: “We’re pleased to see that the regulator has... decided to include a cross-subsidy if intermediary class thresholds are breached. This will be an important measure in helping ensure that product providers retain some responsibility for their products.
“However, we are disappointed that the FSA has pressed ahead with the increase in the threshold for investment intermediaries. The wider economic environment and the RDR are affecting adviser revenues, and this decision is a missed opportunity to build a more stable, affordable and sustainable funding model.”
Guy Sears, IMA institutional director, said: “Every product provider serving retail consumers will have a direct link to compensation related to their independent distribution channels.”
