The City watchdog is looking for feedback on how best to protect consumers' cash

Hayley Kirton
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The funding of the scheme was last reviewed back in 2013 (Source: Getty)

The City watchdog has today launched a consultation into how best to fund the safety net which compensates consumers when financial services firms find themselves in hot water, including measures which could lead those most likely to wobble the market paying more to keep it secure.

The Financial Conduct Authority (FCA) noted the funding rules for the Financial Services Compensation Scheme (FSCS), which is topped up through levies paid by financial services firms, were last reviewed in March 2013.

Since then, the regulator has noticed a sharp increase in the impact FSCS levies is having on some firms, with life and pensions intermediaries coming off particularly badly.

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In particular, the City watchdog is seeking feedback on whether professional indemnity insurance (PII) could be better used to cover claims, whether the levies charged should better reflect how risky firms' products are and whether compensation limits need to be increased in light of the recent introduction of the pension freedom rules.

The freedoms allow people to access their pension pot without first purchasing an annuity, but the FSCS still applies a more generous level of compensation to annuities compared to drawdown products.

The FCA is also looking into introducing FSCS coverage to debt managers and expanding coverage for fund managers.

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In 2015-16, the FSCS shelled out £271m in compensation to consumers and received over 46,000 new claims.

Meanwhile, total levies, excluding those linked to major banking failures, in the same period came to £338m, up by £107m for the year, thanks mainly to a £85m bump in charges on life and pensions intermediaries.

"The FSCS plays a vital role in ensuring consumer confidence in financial services," said Christopher Woolard, executive director of strategy and compensation at the FCA. "We want to ensure protection for consumers and fairness for firms that pay for the compensation."

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The consultation will run until the end of March next year, and final rules and a further consultation on the proposed rule changes are expected to be published next Autumn.

The idea of a risk-based levy being introduced and PII being used to cover more risk should not come as a shock to firms. Back in March, the final report for the Financial Advice Market Review, produced jointly by the Treasury and the FCA, recommended the merits of such a scheme should be explored.

However, Hugh Savill, director of regulation at the Association of British Insurers, warned the proposals as they stood could lead to insurers taking on extra costs to safeguard failures of intermediaries.

"We see no justification for the blurring of responsibilities in this way," Savill added. "We will be engaging fully in the consultation, with a focus on challenging the rationale behind this idea."

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