In operation from 1 April 2008, the new system will:
- considerably increase the funding available to pay valid claims to consumers;
- be more robust and sustainable than the present arrangements;
- promote greater consumer protection and help maintain market confidence through financial stability;
- apportion the cost of compensation between regulated firms as fairly as possible; and
- be simpler to administer.
"Notwithstanding recent market developments, we feel it right to continue with the new and improved FSCS funding model. Recent experience shows how much improvements are needed. Further changes may be made to the FSCS arising from HM Government and other initiatives - these do not remove the need to improve the scheme now, but will supplement the improvements being made."
New funding model
The new funding model relates to retail business and introduces a 'widening circle' of funding under which compensation costs emerging from a particular sub-class of firms is borne by that sub-class alone, up to its annual threshold, after which higher costs are shared more widely. It also expands the overall financial capacity of the scheme - up to a maximum of £4.03 billion per year.
The scheme is divided into five broad classes (life and pensions; investments; general insurance; deposits; and home finance). Each class, except deposits, will have two sub-classes and above these broad classes would be a general retail pool. The initial tranche of costs will fall to the relevant sub-class, the next to the relevant broad class and then finally above that to a general retail pool. This last level of funding is only expected to be triggered in the event of a significant default, or series of defaults.
Wholesale pool
In a Consultation Paper published earlier this year, the FSA explored the possibility of including a final level of extra funding of between £1-2 billion for the FSCS – the so-called wholesale pool.
This would have consisted of firms making contributions based on the amount of wholesale business carried out, covering investment banks, institutional fund managers, wholesale general insurers and reinsurers - as well as the wholesale business of retail firms already subject to the funding arrangements of the FSCS.
While there are sound policy reasons for creating a wholesale pool the FSA has decided not to take this issue further at this time. This decision follows careful consideration of the feedback received during the consultation, and the legal basis of the constitution and potential impact.
Other initiatives
The FSA, HM Treasury and Bank of England published a discussion paper Banking reform –protecting depositors in October 2007. This focused on possible changes in a number of areas related to bank failure and insolvency, and to the provision of compensation to consumers across all financial sectors.
The FSA has established a project to carry on work related to the discussion paper. This will consider the range of tools available to the authorities to deliver the outcomes of appropriate consumer protection, market confidence through financial stability and competitiveness.
The discussion paper also questions the limit of compensation payable for each eligible deposit claim. The FSA will examine this as part of a cross-sectoral review of limits affecting investments, insurance, and mortgage advice and arranging and will also look at the role of co-insurance (i.e. should eligible claims be recompensed at 100% of loss incurred or at some lower percentage). This work was originally planned for 2009 but will be addressed now.
