UK FCA seeks revision of FSCS rules, funding method

UK FCA seeks revision of FSCS rules, funding method

UK’s Financial Conduct Authority (FCA) proposed on Wednesday new rules and a new method for funding of the Financial Services Compensation Scheme (FSCS) it operates, which envisions a more fair contribution from licensed entities and to ensure there are sufficient funds to compensate prospective claimants.

The FCA proposes a number of changes to the FSCS, including introducing a risk-based FSCS levy and requiring financial product providers to contribute towards FSCS funding relating to claims caused by intermediary defaults. The watchdog believes amend payment arrangements would align the amount of the levy to the years that each element is charged for and enable firms and the FSCS to better plan.

“The Financial Services Compensation Scheme plays a vital role in ensuring consumer confidence in financial services,” said Christopher Woolard, executive director of strategy and competition at the FCA. “We want to ensure protection for consumers and fairness for firms that pay for the compensation. We want to have a full debate with all interested stakeholders and this paper sets out the range of fundamental issues we want to discuss,” he added.

The regulator also considers alternative financing for the fund. One option envisions the use of a credit facility. The FSCS would use its existing credit facility or a similar facility to both spread the costs of significant levies and make levies generally less volatile and more predictable.

The regulator also proposes Lloyd’s of London, a syndicate of underwriters and brokers, should be required to make contributions to the retail pool, which would be called upon if costs in a particular intermediary funding class were so high that they breached the class’s affordability thresholds.

In addition, the FCA’s proposals include the introduction of additional reporting requirements that would enable it to introduce risk-based levies in the future, as well as extended consumer protection. According to the regulator, FSCS coverage should be extended for some aspects of fund management and introducing it for debt management and structured deposit intermediation.

Clients of UK-licensed forex brokers are eligible for a compensation of up to £50,000 in case of the entity’s default. The current framework of FSCS was approved in March 2013. The scheme’s financing method has not been changed since then.

The FCA has launched a consultation on the proposed changes and will collect feedback from market participants by 31 March, 2017. It intends to publish final rules and a further consultation paper on proposed rule changes in Autumn 2017.

“We will keep the proposals under review to assess whether any amendments will be required due to changes in the UK regulatory framework, including as a result of any negotiations following the UK’s vote to leave the EU,” FCA’s consultation paper read.

Overall, the FCA’s proposals could be summarized as follows:

FSCS rules:

  • asking for feedback on the professional indemnity insurance (PII) market and the coverage that it provides – the FCA is considering proposals to make PII more effective through the introduction of mandatory terms
  • introducing product provider contributions towards intermediation claims
  • changing the FSCS funding classes for intermediation activities
  • updating limits on consumer coverage in light of the pension freedoms
  • exploring the potential for FSCS levies to better reflect the risks posed by particular practices

FSCS funding:

  • amending payment arrangements so that firms may be asked to pay a proportion of the levy on account
  • introducing FSCS coverage for debt management firms
  • extending coverage in respect of fund management
  • applying FSCS protection to advice and intermediation of structured deposits
  • ensuring that FCA rules include Lloyd’s of London appropriately, in circumstances where they could be called on to contribute

Recently, the FCA has been very active in proposing new rules for the markets it oversees. It proposed alterations to the forex market regulation and announced intentions to alter the crowdfunding rules soon.

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