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This article first appeared in the AIA Accountancy e-News, for more information click here.

The Financial Services Authority (FSA) has confirmed new rules designed to secure funding for the Financial Services Compensation Scheme (FSCS) in a way which is affordable for firms.

The FSCS provides compensation for customers if a regulated financial services firm cannot pay claims made against it. The scheme is based on funding classes which means that contributions from regulated firms are based on the type of business they carry out and are subject to annual thresholds.

In July 2012, the FSA proposed maintaining existing funding classes but using new annual thresholds based on affordability. Both these proposals will be adopted and will come into force when the FSA is replaced by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) on 1 April 2013.

The FSA also proposed setting up a Retail Pool, a collective resource funded by intermediaries and the investment providers which would be triggered if one or more of those classes reached their threshold. In light of industry concerns about this approach, the FSA is today opening a month long consultation on a proposal that all providers should make contributions when the pool is triggered by the failure of an intermediary. This would include contributions from banks, insurers and home finance providers.

Sheila Nicoll, FSA director of conduct policy, said: "We have listened to industry concerns and want your input on this revised approach for the FCA Retail Pool.
"Finding consensus on this subject is always going to be a challenge but we remain committed to finding a workable solution that firms can afford and live with."

The main features of the paper are:

  • There will be no changes to the current funding classes;
  • The proposals for thresholds based on assessments of affordability will be taken forward.

The FSA will consult on a proposal for FCA regulated providers to make contributions to the FCA retail pool, when an intermediation class breaches its threshold, rather than just those providers that participate in the FCA FSCS funding classes. The consultation will run until 18 February 2013.

From 1 April 2014, the FSCS will be able to smooth the impact of levies by looking further ahead at potential compensation costs expected in the 36 months following the levy instead of twelve months as is currently the case (except for the deposits class).

This article first appeared in the AIA Accountancy e-News, for more information click here.

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