Following an announcement of a potential new funding approach, the regulator has produced a consultation paper will accept responses on its proposals until the 25 October 2012.
The FSCS is funded by contributions from regulated firms based on the type of business they carry out, which informs their "class".
There are five broad classes based on five industry sectors: deposits, investments, life and pensions, general insurance and home finance. The classes are then sub-divided into provision and intermediation of such products.
Sheila Nicoll, FSA director of conduct policy, said: "A viable compensation scheme is essential to financial services – investors and savers need to have confidence. The industry can agree on that, but as soon as it comes to discussions about funding, all such agreement immediately breaks down.
"Compensation funding inevitably means that different sectors have competing interests. Our role has been to walk the middle ground and produce a workable solution that we believe the entire industry can afford and live with."
The review on funding for the FSCS was started in October 2009 but then put on hold for 12 months due to uncertainties around the effect of regulatory reform on the FSCS. It began again in October 2011 following high profile defaults and continued pressure on intermediary classes.
FSCS funding as it stands
Under the current model each sub-class has a threshold on the amount it can be asked to contribute to compensation costs in any given year. If the threshold is reached then any further levy requirements are met by the broader asset class and if this reaches its threshold then other classes will be asked to contribute in a practice termed "cross-subsidy".
It is this concept that many groups are opposed to, particularly since in the new twin-peak FSA structure, different types of firms will fall under the jurisdiction of the Prudential Regulatory Authority and the Financial Conduct Authority respectively.
The IMA for example, said it was "dismayed" that cross-subsidising would still be called upon in the FSA’s new proposals.
Its chief executive, Richard Saunders, said: "These proposals different types of firms to completely different liabilities in a totally inequitable way. Banks and insurers, which will in future be regulated by the Prudential Regulatory Authority, are looked after in their own scheme with no exposure to cross-subsidy.
"But fund manufacturers, to be regulated by the Financial Conduct Authority, will not only be responsible for compensation arising from the failure of other fund management firms but will also be obliged to stand behind excessive claims from the failure of distributors who mis-sold products of any type."
To read the FSA’s consultation paper, click here. Let us know what you think of the FSCS and how you think it should be funded in the comments box below…
