FCA’s Consultation paper: Reviewing the funding of the financial services compensation scheme, Chapter 7 – reviewing the funding classes and smoothing costs

In 2015/2016 The Financial Services Compensation Scheme (“FSCS”) paid out £271m in compensation to consumers and received over 46,000 new claims. Firms from across the financial services industry pay levies to fund both the FSCS’s operating costs and the compensation it pays out. The FCA’s Consultation Paper 16/42 sets out for discussion a range of options for changing both how the FSCS is funded and the coverage it gives consumers.

Chapter 7 outlines the FCA’s plans to tackle volatility in FSCS levies through a revised class structure as the problem of volatility has become more prevalent in recent years. The below table sets out the questions the FCA has posed to firms in relation to this topic and its own views.

 

 

Question

 

FCA VIEW
Q12: Do you agree that it would not be justified for the FSCS to utilise a credit facility to further smooth levies, given the costs involved?

 

·         The FSCS were asked to explore various options in securing additional credit facilities and the FCA believe that the costs of such facilities would lead to an increase of between 12% and 38% on firms’ portion of the base costs levy.

·         Firms can already gain access to credit to spread the costs of FSCS levies, which is more cost effective than this proposal.

·         The FCA has therefore concluded that it does not make financial sense to use the FSCS’s credit facility to smooth levy payments for firms, as it believes the costs would rise overall, due to the costs of borrowing.

 

Q13: Do you believe that we should seek to reduce the number of funding classes, in order to reduce volatility of FSCS levies? ·         It has been suggested that the FCA consider reforming the FSCS funding classes to distribute the burden of FSCS funding more evenly among intermediaries.

·         Some firms are keen for the FCA to further sub-divide the funding classes, but the FCA believes this will cause more volatility.

·         The FCA believes that reviewing the construction of funding classes will help make levies more predictable.

Q14: What are your views on the different funding classes we have set out here? Do you have any alternative proposals? ·         The FCA are considering three structure options:

1.         merging the four current intermediation classes with product provide contributions from all providers for the first pound of any claim;

2.         merging investment intermediation and Life and Pensions intermediation with product provide contributions from the relevant provider classes from the first pound of any claims; and

3.         keeping the current intermediary class structure with increased product provider contributions from the relevant provider classes from the first pound of any claim.

·           Option 1 would result in a smaller number of classes, and so the risk would be spread more evenly.

·           Options 2 and 3 would both reduce the relative contributions lf all intermediary classes.

Q15: Do you agree with our intention to keep the current class thresholds for intermediary classes, merging the thresholds if appropriate to adopt a revised class structure?

 

·         After carrying out an affordability analysis, the FCA does not believe there is a case for changing the current class thresholds.
Q16: Do you agree with our intention to keep our current threshold of £200m for the investment provision class? ·         The FCA believes that there is no need to alter the threshold, as previous reviews deemed this threshold affordable.
Q17: Do you have any views on the idea of a fixed levy for smaller firms? ·         The FCA believes that introducing a fixed levy for smaller firms would not be the right approach and would be unfair, despite some stakeholders believing it would reduce volatility.

·         If smaller firms were to pay a fixed levy, this levy would be a minimum of £850 and over the last six years, 82% of smaller firms have paid FSCS levies of less than this figure.

The FCA is looking for input on the above questions by 31 March 2017. Please email: cp16-42@fca.org.uk with your views.

To access Chapter 7 of the FCA’s Consultation Paper, please click this link: https://www.fca.org.uk/publication/consultation/cp16-42.pdf and turn to page 41.

For more information, and any guidance or advice on the above topic, Cleveland & Co, your External in-house counsel, are here to help.

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