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FSA restarts compensation scheme funding review

A review of funding arrangements for the compensation scheme used to settle customer claims against financial services firms which are unable to pay is restarting, the Financial Services Authority (FSA) has announced.05 Oct 2011

The FSA, which regulates the scheme, said that it hopes to formally consult on how the Financial Services Compensation Scheme (FSCS) is funded in the first half of 2012.

The FSCS can pay compensation to eligible customers of financial firms including banks, building societies, credit unions, insurers, fund managers and intermediaries if the firm is unable to pay claims against it. It is funded by levies paid by over 16,000 participating firms.

The review initially began in October 2009 but was suspended the following year because of uncertainty surrounding the Government's plans to change how financial services are regulated in the UK. However the Treasury has now published its proposals on the future structure, rule-making arrangements and accountability of the FSCS, the FSA said.

The regulator also cited a recent European review of the Deposit Guarantee Schemes Directive (DGSD) as a reason for the delay. The DGSD governs the operation of financial services compensation schemes across the European Economic Area, including the FSCS.

The FSA review will be led by the director of conduct policy Sheila Nicoll, and will look at the size of the levy and how costs are distributed among the participating companies.

The British Insurance Brokers' Association (BIBA), which has expressed concerns with the current funding model, gave the review its backing.

"The unfairness inherent in the current FSCS funding model is a major cause of concern to me and our members. We are being unfairly penalised by rapidly increasing levies for the mistakes of the credit sector, insurers and the regulator. This funding review gives the FSA the chance to reconsider our principal concerns," said Eric Galbraith of BIBA.

"The UK is the only state in the EU where insurance intermediaries are exposed to potential losses elsewhere in the financial services sector, putting our members at a commercial disadvantage."