Providers to contribute to intermediary FSCS claims: FCA

"Bearing in mind firms’ product governance responsibilities and the burden that has fallen on intermediary firms in recent years in funding the FSCS, we believe it is appropriate that providers pay additional contributions."

As part of a consultation, the FCA is exploring the introduction of risk-based FSCS levies as well as changes to the funding classes for intermediation activities.

In its consultation paper, the FCA said: "We have considered the role that authorised product providers play in the market and propose a change to their funding requirements. Currently, authorised product providers only contribute to the costs of failed intermediaries from levies they pay for their own intermediation activities within the intermediation funding classes, and also to any costs incurred if the retail pool is triggered.

"Bearing in mind firms’ product governance responsibilities and the burden that has fallen on intermediary firms in recent years in funding the FSCS, we believe it is appropriate that providers pay additional contributions.

"In each case, we will look at including contributions to intermediation classes from the provider classes. In contrast to the current arrangements, product providers could potentially contribute from the first pound of any claim facing intermediaries up to relevant limits."

The regulator also plans to introduce mandatory terms for professional indemnity insurance and update the limits on consumer coverage in light of the pension freedoms.
   
The FCA is also consulting on a number of specific proposals to change rules affecting the scope and operation of FSCS funding, including amending payment arrangements so that firms may be asked to pay a proportion of the levy on account.

It also wants to introduce FSCS coverage for debt management firms and protection to advice and intermediation of structured deposits.

The FCA plans to publish a further Consultation Paper on proposed rule changes in Autumn 2017.

Keith Richards, Chief Executive of the Personal Finance Society, commented: “While it is disappointing that the FCA has effectively ruled out the possibility of introducing a product levy, it has acknowledged that there are other ways it could more clearly link product risk to FSCS charges.

“The concept of a risk-based levy, where firms could be eligible for a discount if their behavior reduced risk, has merit and is certainly worth considering in more detail.

“It is pleasing that the FCA has acknowledged in its consultation paper that the burden of funding the FSCS has fallen disproportionately onto intermediary firms in recent years, however the idea of shifting the burden to product providers should be approached with caution.

“What’s most important is that the burden of FSCS funding is shifted to higher risk segments of our sector. Given the language used by the FCA in its consultation paper, I am optimistic that this will be the result of its review.”

Hugh Savill, Director of Regulation at the Association of British Insurers, added: “We are very concerned at the proposal for insurers to bear additional costs to guard against failures by intermediaries such as brokers and advice firms – something insurers have very little direct influence over. We see no justification for the blurring of responsibilities in this way. We will be engaging fully in the consultation, with a focus on challenging the rationale behind this idea.”