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FSCS funding proposal is a 'significant cause for concern', says Hogan Lovells

25 October 2012

LONDON, 25 OCTOBER 2012 - The FSA’s proposed financial services compensation scheme (FSCS) funding model is a significant cause for concern according to a report by Hogan Lovells, written on behalf of the Investment Management Association (IMA) in its response to the regulator’s consultation. 


Charles Brasted, Of Counsel at Hogan Lovells, who co-authored the report with associate Julia Marlow, commented: "In the report we identified three general core principles that should underpin the funding approach: fairness to contributors, operability and resilience, and regulatory coherence. We found that there was significant cause for concern that the current arrangements do not fully comply with those principles.  The fact that the FSA is consulting on substantial changes is a recognition of that widely-held concern.

"Fairness has a number of facets, but at its core is the principle that compensation costs should be borne as far as possible by those with the closest business affinity to the failed firm.  That principle is expressly embedded in the statutory provisions that underpin the scheme, and by which the FSA is bound when making rules governing the scheme s. 213(5).

"The IMA is deeply concerned that, in seeking to improve the fairness of the scheme, the FSA has put forward proposals that simply do not reflect the statutory requirement.  By removing general insurers, life and pensions providers from any exposure to the costs of failures by intermediaries in respect of their products, while at the same time reinforcing the exposure of investment managers not only to investment intermediaries but to all other intermediation, the proposals not only appear to be inconsistent in their approach but also to move further away from the principle of business affinity, which is embedded in statute. 

"The proposals appear to reflect an assumption that business affinity can be assessed adequately by reference simply to the authorisations held by a firm, without having regard to the full scope of the supervisory arrangements relevant to it and its products.  The IMA's consultation response explains in detail why they consider that assumption to be misconceived."

Guy Sears, IMA Director of Wholesale, says:


“The FSA’s proposal is wholly unacceptable.  Their current model absolves banks and insurance providers of any obligation to contribute to the FSCS. Are general insurers, life and pensions providers really to be off the hook for the mis-selling of their own sector’s products? This is absurd.


“To go further and expect fund managers to pay for that mis-selling is entirely unreasonable. The FSA is sending the wrong message to every segment of the industry: those which have the highest complaints rates no longer have to contribute; and fund managers now have to bear the burden of every large intermediary failure.  


“The new FCA needs to be a strong conduct risk regulator and that will mean looking hard at all product providers. The design of the compensation scheme should reflect this. If not, that will be a worryingly backward step for investor protection. The IMA proposes the use of a reserve policy and three year forecasts. If adopted, our model would provide greater certainty to firms about future levies, smooth exceptional claims and ensure the right person pays.”  


The report also identifies a number of other aspects of the current rules that militate against fairness.  These include the way in which any cross-subsidy from one class or sub-class to another is treated, the way in which any subsequent recoveries are dealt with and the way in which levies are apportioned within sub-classes, arising from a mismatch between the tariff bases used and verifiable business reality.  

The consultation closes today, Thursday 25 October 2012.

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