A third concern is around the availability and scope of professional indemnity insurance (PII). The FSCS is intended to be a compensation scheme of last resort, with firms' PII cover and own reserves being the front stop. However, the FCA is concerned that the FSCS has increasingly taken on the role of "first line of defence" when firms fail. While PII cover is mandatory for personal investment firms, there are few requirements regarding the scope of such insurance. A particular concern is that certain policies may exclude liability for specific types of claim or may not provide coverage where the firm is insolvent, meaning the FSCS is unable to recover the costs of claims from insurers.
Intermediaries are also concerned that compared to product providers, they are expected to pay a disproportionate contribution to investor compensation where losses occur following the failure of a high risk product. The FCA also believes that funding arrangements can better reflect the affinity between product providers and the firms that distribute their products.
Proposals
The consultation sets out for discussion a range of options for changing both how the FSCS is funded and the coverage it gives consumers. A number of the proposals which the FCA describes as "ideas and options for discussion" are intended to generate feedback. They describe a number of ways in which the FSCS and PII market could be reformed – in some cases radically.
The FCA has also taken the opportunity to put forward some more specific proposals requiring changes to the handbook, which, subject to feedback, the FCA intends to make. These proposals are somewhat less radical than the "ideas and options for discussion" but are still capable of having a material effect on some sectors, especially firms which will become subject to FSCS levies for the first time.
Risk
The FCA is seeking feedback on how the current model for apportioning contributions to the compensation fund can be amended to address concerns that current contributions do not properly reflect the degree of risk that individual firms present.
One idea that is frequently proposed by intermediaries is a product sales levy (akin to an insurance tax) the cost of which would be paid by the customer. The FCA believes this proposal reflects many firms' belief that product providers should price in the need for FSCS funding; although this is perhaps driven by a desire on the part of intermediaries to make the costs of FSCS protection more transparent to customers.
