FCA proposes radical shake up of FSCS funding

It is also looking at whether levies should be more closely related to the risks created by different business practices in financial services, but it has not come up with specific proposals on this.

Instead it put forward the idea of a rule which will introduce data collection for activities linked to higher risk products.

This, the FCA stated, would help it develop a risk based approach in the future.

Today's (14 December) paper from the FCA acknowledged that while the FSCS plays a critical role, it's protection comes at a cost to the industry and, ultimately, consumers.

With regards to funding classes, the FCA has said it is looking at reducing their number to reduce the volatility of the levy.

It is considering three options for this, all including contributions from product providers towards the first pound in any claim.

The options include merging the four current intermediation classes, merging investment intermediation with life and pensions intermediation and keeping the current structure.

The FCA said it had received representations to split the classes further, but said this would likely increase volatility rather than reduce it.

Christopher Woolard, executive director of strategy and competition, said: "The FSCS plays a vital role in ensuring consumer confidence in financial services.

"We want to ensure protection for consumers and fairness for firms that pay for the compensation.

"We want to have a full debate with all interested stakeholders and this paper sets out the full range of fundamental issues we want to discuss."

The paper also questioned whether the professional indemnity insurance market was working.

It acknowledges there are few providers in the market and some advice firms struggle to purchase appropriate cover.

The FCA said it was considering introducing mandatory terms for PI insurance, such as requirements to have run off cover and restricted use of limitations.