FSCS: Ring-fencing levies could lead to higher costs

Ring-fencing industry sectors from each other in respect of levy paying could cost companies more in the long-run, the Financial Services Compensation Scheme’s chief executive warned.

In a speech delivered today (14 November) to the Building Society Association, Mark Neale argued that while being isolated from levies associated with other firms’ failings in other sub-sectors might be appealing at first, it could lead to much more unpredictable payments.

He said: “As I’m sure any insurer would tell you, broader pools tend to be more resilient than narrower ones. It’s tempting to want to ring-fence yourself from others’ losses, but the consequence can be much higher costs when sooner or later a loss occurs on your own patch.”

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Mr Neale added however that he was personally “sympathetic” to the idea of risk-weighted levies, and called for BSA members to present their ideas for levy payments to more accurately correspond with firms’ inherent stability.

He said: “But if we’re going to go down that path, we must have a transparent, objective and fair method of recognising risk.

“So, if that’s what you want, please come forward with ideas about how we might put risk weighting into practice.”

This follows on from the Financial Services Authority revealing in a policy statement in March that some providers had 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 so 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”.

The Association of Mortgage Intermediaries previously suggested there should be a ring-fencing on banking bailouts so that its members do not get caught out paying FSCS levies.