The Scheme pays compensation to eligible customers of authorised
financial services firms if the firm is unable or likely to be
unable to pay claims against it. This includes claims against
insurers and, since January 2005, insurance brokers.
In January 2008, the scheme reported that it had paid out £1
billion in compensation to consumers since it was set up in
December 2001. It predicts that it will receive about 11,000 new
claims in 2008/9 across the full range of financial services.
There is, though, an anomaly in the way the scheme deals with
some insurance-related claims.
Under current rules, if an insurance policy is issued by a UK
insurer via a branch in another EEA state and covers a UK-based
risk, it falls within the scheme. But if it covers a risk based in
another EEA state, it does not.
The FSA wants to remedy this as soon as possible by amending the
scope of the FSCS so that UK and EEA risks written under long-term
or general insurance policies issued through EEA branches of UK
insurers will be treated in the same way.
A consultation paper setting out its proposals was published
last week. The FSA has imposed an abbreviated one-month time limit
for responses (until 9th June) in the hope that the new rules can
be finalised in July this year.
The FSA does not believe the change will result in a significant
amount of additional EEA branch business falling within the scheme,
so it is not planning any consequential changes to the new funding
arrangements which came into force on 1st April.
These introduced cross-subsidies across business classes for the
first time. The FSCS is now divided into five classes: life and
pensions; investments; general insurance; deposits; and home
finance. Each of these (except deposits) is divided into two
sub-classes for providers and intermediaries.
Each class meets the compensation costs associated with firms in
that class, up to a certain threshold. But above that level, costs
are met by a general retail pool to which all the classes
contribute. As a result, in the case of serious default, firms in
one class could find themselves contributing to the liabilities of
firms in a different industry sector.
