In the letter, the IMA outlines concerned about the fact that banks and insurers face no potential liability in the event of mis-selling of their products by an intermediary whereas they are liable in the event of default by another bank or insurer.
The organisation argues this is because: “The proposals effectively divide the compensation scheme into two entirely separate schemes: one for firms which will be prudentially supervised by the PRA and a distinct scheme for firms prudentially supervised by the FCA. The latter contains cross-subsidy arrangements, but the former does not.”
It also points out that fund managers are also potentially liable for compensation costs for the mis-selling of banking and insurance products if the relevant cap is exceeded in any year.
All of this raises “severe inequality” between the different product providers, with the IMA asking three very pointed questions of the current FSCS funding proposals:
- Why should fund managers face a different set of liabilities from banks and insurers?
- Why should those liabilities extend to the mis-selling of bank and insurance products when the manufacturers of those products are excluded?
- Why are banks and insurers outside the “FCA” scheme, when they will be supervised by the FCA for conduct of business?
While the IMA is keen to point out that the letter is not its draft response to the FSA – which will be submitted at the end of October – it goes go on to point out what it describes as a "fairer alternative":
- Banks and insurers should be brought within the scope of the FCA scheme for cross-subsidy purposes, as they will supervised by FCA for conduct of business;
- Firms which will be prudentially supervised by the FCA should continue to have no liability under the PRA scheme because they will not be supervised by PRA;
- The combined cap on the FCA scheme should remain at £790m. This would mean that the maximum liability that PRA-regulated firms could face from the FCA scheme would be no more than 15-20% of their own caps. This would not have a material impact on the ability of firms to fund any liabilities arising under the PRA scheme, given the facility for rolling liabilities forward.
It will also press for greater use of borrowing powers in the FCA scheme before recourse to cross-subsidy.