The Financial Services Compensation Scheme

The Financial Conduct Authority (“FCA”) has published Handbook Notice 48, setting out the changes made to the FCA Handbook under the following instruments that were made by the FCA board in September and October of 2017, such as the Financial Services Compensation Scheme (Funding and Scope) Instrument (“FCA 2017/58”).

What is the Financial Services Compensation Scheme

The Financial Services Compensation Scheme (“FSCS”) is the UK’s statutory deposit insurance and investors compensation scheme for customers of authorised financial services firms. This means that the FSCS can pay compensation if a firm is unable, or likely to be unable, to pay claims against it. The FSCS is an operationally independent body set up under the Financial Services and Markets Act 2000 (“FSMA”), and funded by a levy on authorised financial services firms. The scheme rules of the FSCS are devised by the FCA and are contained in the FCA’s Handbook; ultimately, the FSCS is accountable to the FCA. The scheme covers:

  • deposits;
  • insurance policies;
  • insurance brokering;
  • investments;
  • mortgages; and
  • mortgage arrangements.

Changes to the FSCS

The FCA 2017/58 makes changes to the extension of the coverage of the FSCS for some aspects of fund management. It introduces it for certain debt management activities and structured deposit intermediation. The FCA 2017/58 will also be effective from 1 April 2018. These changes include:

 

Changes New requirements
Requiring Lloyd’s of London to contribute to the retail pool The FCA has introduced levies on Lloyd’s of London to be calculated as the aggregated of the levies that would be imposed on each member, as follows:

–      a share of the base costs levy for each financial year; and

–      a share of a specific costs levy or a compensation costs levy allocated to the general contribution class in the retail pool.

This will be called upon if costs in a particular funding class are so high they breach the class’s affordability thresholds.

Additional reporting requirements A participant firm must provide the FSCS by the end of February each year with a statement of:

–      classes to which it belongs; and

–      the total amount of business which is conducted, in respect of the most recent valuation period ending before the relevant year in relation to each of those classes except the FCA provider contribution classes.

If a participant firm does not submit a complete statement by the date in which it is due:

–      the firm must pay an administrative fee of £250; and

–      the compensation costs levy and any specific costs levy will be calculated.

This will potentially enable the FCA to introduce Risk Based Levies (“RBLs”) in the future. RBLs take into account the risk of a scheme’s sponsoring employer becoming insolvent and the amount of compensation that would then be payable.

The Chief Executive of the FSCS, Mark Neale, has backed the idea of introducing RBLs. In the Financial Times Adviser in November 2017, he stated that penalising firms that sell high-risk products was the ‘most promising’ option in the scheme’s pursuit of a fairer levy system for advisers.

 

Amending payment arrangements The FSCS levy is made up of:

–      management expenses; and

–      compensation costs.

Firms may be asked to pay a proportion of the levy on account under new rule 6.7. Where a participant firm must pay its periodic fees for a fee year, it must pay its share of any levy made by FSCS for the financial year of the compensation scheme which is the same as that fee year as follows:

–      by 1 April an amount equal to 50%, or such lower percentage as the FSCS may determine, of the participant firm’s share of the levy payable for the previous financial year of the compensation scheme; and

–      by 1 September the balance of the levy due from the participant firm for the current financial year of the compensation scheme.

The FCA 2017/58 has also removed the rule that allows firms to pay the FSCS levy by direct debit. Instead, the FCA Handbook only states that a participant firm must pay its levy in one payment, with no rulings on the method of payment.

Next Steps

For more information or advice on the Revised Code, Cleveland & Co external in-house counsel, your specialist outsourced legal team, are here to help.

 

 

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