The proposals extend existing funding arrangements for FOS and FSCS to mortgage firms and general insurance intermediaries and are based on the FSA's approach to setting fees for these sectors.A brief summary is set out below.
Funding arrangements for FOS
· Two new "industry funding blocks" will be created: one for mortgage business and one for general insurance broking. The funding block arrangements mirror the FSA's approach to fee-blocks which are structured according to regulated activity in order to minimise cross subsidy between firms doing different types of business.
· In line with the existing FSA fees regime, firms must pay the general levy in each funding block they belong to.
· Tariff base: Each funding block has a tariff base which is the measure used to calculate a firm's share of the general levy. For mortgage firms and general insurance intermediaries, the tariff base will be the same "annual income" measure used for FSA fees.
However, the FSA recognises that some firms' annual income may only include a relatively small proportion of business that would give rise to eligible complaints to the FOS. Eligible complaints include those from private individuals and small businesses, charities and trusts with a turnover of less than £1 million. Firms will therefore have the option of reporting a tailored income figure that more accurately reflects the proportion of their business that could give rise to eligible complaints.
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· Costs: The FOS budget is covered by a combination of a general levy on all firms and a case fee charged on individual firm complaints handled by the FOS. The case fee covers the costs of processing complaints whilst the remaining operating costs are met through the general levy.
· For the financial year 2004/2005, FOS will not be charging a general levy for mortgage firms and general insurance intermediaries. Instead firms will pay a special case fee of £550 per case (which already applies to complaints where firms are not required to contribute to the general levy) with the first two cases not subject to a fee.
· The FSA will consult on the FOS general levy, for the financial year 2005/06, as part of its annual fees consultation at the end of the year. This will cover the tariff rates for the new industry blocks and also their minimum levy amounts.
Funding arrangements for FSCS
· There will be two separate sub-schemes : one for mortgages and the other for general insurance brokers. Firms will have to contribute to each sub-scheme, as appropriate, through the contribution group for that scheme.
· The FSCS makes two types of levy on participant firms: those for management expenses and those for compensation costs.
· The management expenses levy covers operating costs and has two components: base operating costs and specific costs of processing claims. Where a contribution group has no claims against it, firms in that group will not be levied for specific costs, they will only be levied for base costs.
· When firms go into default the FSCS raises a compensation levy. This is done on a 'pay as you go' basis. Each contribution group has a tariff base that is used to calculate each firm's share of the compensation levy. For mortgage firms and general insurance intermediaries, the tariff base will be the same "annual income" measure used for FSA fees. As with the FOS, firms will have the option of reporting a tailored income figure that more accurately reflects the proportion of their business undertaken with eligible claimants (individuals and smaller businesses).
· To avoid the need to issue a large number of very low value invoices, the management expenses levy will not be collected until the 2005/06 financial year. Invoices for 2005/06 will cover that year and the 'stub' period from the start of regulation to 31 March 2005.
· The FSA will consult on the management expenses levy limit (the maximum the FSCS can raise in total from the industry) at the end of the year in its annual consultation on fees.
Consultation on the FSA proposals for mortgage and general insurance funding of FOS & FSCS (CP04/04) closes on the 2 July 2004 and final rules will be made before the start of mortgage regulation on 31 October 2004.
