UK Financial Conduct Authority Proposes Changes to Financial Services Compensation Scheme Levies and Rules

The Financial Conduct Authority launched a consultation on the future funding of the Financial Services Compensation Scheme as well as changes to the FSCS rules. The FSCS is the compensation scheme for customers of UK authorized financial services firms. It covers the business conducted by firms authorized by the Financial Conduct Authority and the Prudential Regulation Authority and protects, subject to certain limits, deposits, investment business, home finance, insurance policies and insurance broking. The FSCS is funded by contributions from firms across the financial services sector. The FCA's consultation follows the Financial Advice Market Review, conducted by HM Treasury and the Financial Conduct Authority, which concluded that the scale and impact of FSCS levies has increased sharply for certain firms recently, particularly those required to contribute towards claims for self-invested personal pensions. This causes concerns relating to the unpredictability of levies and, in some sectors, a relatively small number of firms being responsible for a large proportion of compensation claims.  

The FCA is carrying out a fundamental review of the FSCS level and the coverage that it provides to consumers. In particular, the FCA is consulting on (i) whether more comprehensive professional indemnity insurance could increase the proportion and value of claims covered by insurance when firms fail; (ii) introducing product provider contributions towards the cost of claims against intermediary firms to reflect the wider responsibilities of product providers in the process; (iii) changing the FSCS funding classes for types of intermediation activities, including alternative class structures; (iv) whether risk-based levies could better reflect the risks of specific practices, particularly for firms distributing higher risk products; (v) updating compensation limits as a result of pension freedoms; (vi) extending FSCS coverage for some aspects of fund management and introducing it for debt management and structured deposit intermediation; (vii) imposing reporting requirements so that more risk-based levies can be introduced in the future; (viii) requiring Lloyd's of London to contribute to the retail pool if costs in an intermediary funding class breached affordability thresholds; and (ix) requiring certain firms to pay a proportion of the levy on account. 

The consultation closes on March 31, 2017. The FCA will publish some final rules later this year but will also consult further on some of the issues raised in its consultation paper. 

View the consultation paper.