FCA targets high PII excesses in FSCS review

The FCA is considering introducing mandatory terms for professional indemnity insurance (PII) as part of a consultation on the future funding of the Financial Services Compensation Scheme (FSCS).

woolardThe proposal would see strengthened mandatory requirements for PII, with the scope for advisers to reduce their premiums by opting for large excesses being curtailed.

Other proposals include 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 and exploring the potential for FSCS levies to better reflect the risks posed by particular practices.

The FCA is also consulting on a number of specific proposals to change rules affecting the scope and operation of FSCS funding, including and amendment to 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 and ensuring that FCA rules include Lloyd’s of London appropriately, in circumstances where they could be called on to contribute.

The ABI has hit out at what it describes as a ‘blurring of responsibilities’ in the consultation between advisers and providers. The Personal Finance Society has backed the acknowledgement of a greater sharing of responsibility between providers and adviser, but is disappointed that the FCA has effectively ruled out a product levy.

The rules for the FSCS were last reviewed in March 2013 when the Financial Services Authority concluded a review of the scheme’s funding and published final rules.  Since then, the scale and impact of FSCS levies has risen sharply for some firms.

FCA executive director of strategy and competition Christopher Woolard says: “The Financial Services Compensation Scheme plays a vital role in ensuring consumer confidence in financial services.

“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.”

ABI director of regulation Hugh Savill says: “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.”

PFS chief executive Keith Richards says: “It is pleasing that the FCA has broadened its review of FSCS funding in response to feedback from the sector.”

“The Personal Finance Society first proposed the idea of merging the FSCS levy with the cost of professional indemnity insurance, and I’m pleased that this consultation will offer stakeholders an opportunity to put forward their views on potential reforms of both systems.

“We have previously expressed our concern about the current shortfalls of PII, and we are pleased that the FCA has acknowledged these by proposing restrictions on policy excess levels and restricted use of exclusions. These proposals need to be examined in greater detail, and it is equally as important that greater competition in the PII market is achieved through the current review.

“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.”