The Financial Services Authority has set out proposals to reform the funding of the Financial Services Compensation Scheme.
A consultation paper has been published by the regulator to outline the reforms are designed to create a funding system that will be more robust and sustainable than the present set-up.
The key proposals in paper introduce a widening circle model of funding under which the first tranche of compensation costs emerging from a particular sub-class of firms, which is borne by that sub-class alone, while higher costs are shared more widely.
The scheme would be divided into five broad classes, life and pensions, investments, general insurance, deposits and home finance. Each class would have two sub-classes, and above the broad classes would be a general retail pool.
The initial tranche of costs would fall to the relevant sub-class, the next tranche to the relevant broad class and then finally above that to a general retail pool.
The FSA also wants to expand the overall financial capacity of the scheme by up to a maximum of 4.4bn per year.
Graeme Ashley-Fenn, Director of the FSA, says: An effective system for compensating consumers is an important part of the regulatory system. The FSCS makes a vital contribution towards two of the FSA statutory objectives by protecting consumers and maintaining consumer confidence in the financial services industry.
While it is not possible to devise funding arrangements which will command universal support from the industry, there was general acceptance that the present arrangements were no longer fit for purpose.
“The proposed system will be capable of meeting current issues such as endowment misselling, but more importantly, will now provide compensation for the unknown unknowns, the future potential compensation claims which nobody has yet thought about.