FSA publishes final rules for new Compensation arrangements

The compensation scheme is a final ''safety net'' for consumers when a financial services firm goes out of business and it provides a key part of the FSA framework to provide appropriate protection for consumers. Consumers will benefit from having a single structure providing a one-stop shop for claims.

The framework for the new scheme follows extensive consultation with industry and consumer groups.

Transitional Arrangements

In order to ensure a smooth transfer of claims and funding from the array of different schemes into the new scheme, the FSA is consulting on transitional arrangements for the scheme. The FSA is seeking views on the draft rules for transitional arrangements so that FSCS may pay compensation in respect of activities before 1 December 2001. Comments on this consultation should reach the FSA by 17 October 2001.

The FSA is also consulting on the amount of the limit to be set on FSCS management expenses for the period 1 December 2001 to 31 March 2002. Comments on this consultation should reach the FSA by 4 October 2001.

Notes for editors

1. The policy statements and feedback on CP58: Financial Services Compensation Scheme - Draft Rules, CP86: Financial Services Compensation Scheme Draft Funding Rules, CP108 - draft transitional rules for the new single Financial Services Compensation Scheme (FSCS), and CP109 - a proposal to set the amount of the limit the new Scheme may levy (or charge) for management expenses incurred are available on the FSA website www.fsa.gov.uk.

2. In setting up the new scheme the FSA is seeking to provide a reasonable level of compensation to individual consumers and small businesses that have lost money through the collapse of a bank, building society, insurer or investment firm.

3. The compensation limits for the new Scheme are: Deposits 31,700 (100% of 2,000 and 90% of 33,000); Investments 48,000 (100% of 30,000 and 90% of next 20,000); Longterm insurance at least 90% of the value of the policyholders guaranteed fund at the date of default; General Insurance, compulsory, 100% of valid claim/unexpired premiums, non compulsory, 100% of the first 2,000 of valid claim/unexpired premiums and 90% of the remainder of the claim.

4. FSCS will be funded by levies on the industry and it is to be funded on a pay-as-you-go basis. The levy contribution groups for investment firms will take into account the FSA fee categories. The tariff bases for insurance firms will change to those set out in the Policyholders Protection Act 1997. For deposit takers, there will be no substantial changes from the funding arrangements for the existing Deposit Protection Scheme.

5. FSCS is a company limited by guarantee without share capital. The Chief Executive of FSCS is Suzanne McCarthy. Nigel Hamilton, Chairman, and seven non executive Board Members were appointed by the FSA in February, 2000

6. FSCS will deal with compensation arrangements currently the responsibility of the following schemes (although operationally it has already subsumed the work of most schemes): the Deposit Protection Scheme, the Building Society Investor Protection Scheme, the Policyholders Protection Scheme, the Friendly Societies Protection Scheme, the Investors Compensation Scheme, the Section 43 Scheme (which covers business transacted with listed money-market institutions), the Personal Investment Authority indemnity scheme, and the arrangement between the Association of British Insurers and the Investor Compensation Scheme Ltd for paying compensation to widows, widowers and dependents of deceased persons.

7. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

8. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.