FSCS could turn to firms to recoup costs from other schemes

New powers are being proposed for the Financial Services Compensation Scheme that would allow the scheme to recoup its management costs when acting for other compensation schemes from FSCS levy payers if the other schemes can’t pay.

The Financial Services Authority has issued a consultation paper setting out proposals on using new powers granted by the Financial Services Act 2010.

One of these powers would come into force in situations where the FSCS is acting on behalf of other compensation schemes, including schemes anywhere in the world outside the UK.

The regulator says there could be situations where the FSCS cannot recoup its management expenses for initial work carried out by it on behalf of the other schemes.

The consultation paper says: “While we do not anticipate these expenses will be significant and consider the likelihood of this happening to be low, we propose making rule changes to FEES 6 to allow for these costs to be recouped from FSCS levy payers should they arise.

“It should be noted that under the new rules the FSCS should have tried its best to obtain reimbursement of the expenses from the relevant scheme before it imposes levies on FSCS levy payers.”

The paper adds that if the FSCS could not recover the money from other schemes, levy payers would be the only way to settle their costs.

The Financial Services Act also enables the Treasury to recover interest costs from the FSCS in case the scheme is called on to contribute to the costs of the Special Resolution Regime, which provides a framework for how institutions should be wound up in the event of their failure.

The consultation paper also moots Handbook changes to revise rules around short-selling, where bets are taken on the likelihood that stocks will fall, and financial penalties for those who break short-selling rules.

Under the proposals the FSA will also have to power to suspend firms from carrying out activities for a certain period of time, to impose fines for those who perform certain functions without approval from the FSA, and the ability to gather information to help identify potential threats to the UK financial market.

The consultation closes on June 25 2010.