Changes to Financial Services Compensation Scheme funding
The FSA is changing the way firms pay for the Financial Services Compensation Scheme (FSCS). This is to make sure the scheme is more robust, has enough money to cope with a major failure by a firm or group of firms, and to make the way it is paid for, fairer.
This will mean changes to the way your firm pays into the scheme
The new funding model will mean there are new contribution group (sub-classes), thresholds for contribution amounts, and a cross-subsidy to give a widening circle of funding for compensation claims. This is confirmed in our Policy Statement PS07/19.
On 17 April 2008 we published a supplementary Consultation Paper to cover the tariff measures we will use to work out each firm's contribution level.
This page summarises the main points and changes to how the funding model for the FSCS will work. We have separate pages showing the chapters in the Policy Statement that are most relevant for different groups of firms:
Here is a summary of the changes:
Sub-classes (formerly contribution groups)
Your firm will be put into new funding categories (sub-classes) that reflect the business that it carries out. FEES 6 Annex 3R in the Appendix of Handbook rules in the Policy Statement outlines which activities fall in which sub-class. If your firm does more than one type of business it will be in more than one sub-class, but only in proportion to the amount of business it does in that group.
Each sub-class has two sub-classes and these are shown below, except deposits. The sub-classes are generally split between a product provider-type firm and a product distributor-type firm. Your firm will be in the sub-classes in each of the groups where it does business:
| Main group | Sub-class | Sub-class |
|---|---|---|
| Life & pensions | Provision (e.g. a life company) | Intermediation (e.g. an independent financial adviser) |
| Investments | Fund management | Intermediation (e.g. a stockbroker) |
| General insurance | Provision (e.g. an insurance company) | Intermediation (e.g. an insurance broker) |
| Home finance (mortgages) | Provision (e.g. a building society) | Intermediation (e.g. a mortgage broker) |
| Deposits | N/A | N/A |
More money available to protect consumers
The new model means the scheme will have access to more money than is available in the various sub-classes alone. A 'general retail pool' will be created to act as an overflow reserve of money once the compensation scheme exhausts a set level of money from one of the classes.
This will provide a cross-subsidy to give a 'widening circle' of funding. This will mean the first part of compensation costs is paid by a particular sub-class from where the costs emerge, before going on to be paid from its wider group and then the retail pool once set levels have been reached. This way higher costs are shared across the wider group, and then on to the whole of the scheme, spreading costs as they grow.
The current scheme does not allow for costs to be shared out among groups if a large amount has to be paid. The new proposals would allow this to happen in the event of a major compensation bill.
The FSCS will sometimes recover money from a firm in default (eg a firm that has gone bust). The amount and likelihood varies from firm to firm. Firms furthest away from the default (but who have contributed to the cost of compensation under the widening circle) should receive the benefit of any money recovered first. The repayments would be made to each of the classes which contributed in proportion to the amount they were levied.
The amount you pay towards the scheme
Tariff measures are the way we calculate how much each firm pays. We have recently issued a Consultation Paper on tariff changes aimed to base the amount you pay on a percentage of the income from each sub-class you do business in (for the fund management and all intermedation sub-classes). Any changes to the tariff measures would apply after 1 April 2009 at the earliest.
Arrangements for the period 1 April 2008 to 31 March 2009
The new sub-classes mentioned come into effect from 1 April 2008. Changes to the tariff measures will not come into force until 1 April 2009 at the earliest (because we have to do a separate consultation on them).
In the period (1 April 2008 to 31 March 2009) we will use the information already submitted by firms to calculate each firm's compensation levy.
To help to make each payment fair, we are collecting some additional information in November 2007 and January 2008. This will, as far as possible, ensure that each firm pays only in proportion to the amount of business it does in each relevant sub-class.
| Sub-class | Type of firm | Tariff measure | Additional Information |
|---|---|---|---|
| Investment intermediation (November 2007) |
Stockbroker, retail intermediary, principal dealers, corporate finance firms | Approved Persons and number of traders (for principal dealers only) | Split of business between investment and life and pensions to nearest 10% from stockbrokers, retail intermediary, and corporate finance firms |
Life and pensions intermediation (November 2007) |
Retail intermediary | Approved Persons | Split of business between investment and life and pensions to nearest 10% from stockbrokers, retail intermediary, and corporate finance firms |
| Fund management (January 2008) |
Fund managers, collective investment scheme managers | Gross income CIS managers already submit |
For firms 'managing investments' – new definition of gross income at FEES 6 Annex 4G in the Appendix to PS07/19 |
| Investment intermediation | Principal dealers, stockbroker, retail intermediary and corporate finance firms | Number of traders (for principal dealers only) and Approved Persons | For principal dealers only – number of traders * |
*Non-exempt principal dealers should submit their number of traders if they only carry out the activities relevant to principal dealing. If any non-exempt principal dealers carry out any other activities within the investment intermediation sub-class their tariff base would be the relevant number of Approved Persons as well as their number of traders. However, to avoid double counting, they would not include in their number of traders any who were also registered as the relevant Approved Persons.
It is vital that your firm responds to the FSA when we write to you. If you don't, you may pay more money than you need to as you will be charged using higher tariff data in one or more sub-classes.
Timing for changes
The changes for sub-classes, thresholds, and the cross-subsidy through the wider general retail pool come into effect on 1 April 2008. The possible further changes relating to the tariff measure changes are due to come into effect from 1 April 2009 (after further consultation).