Compensation scheme to be re-jigged by FSA

The City watchdog finally caved in yesterday to demands to review the way in which the Financial Services Compensation Scheme (FSCS) is funded, committing to an overhaul of the system by autumn next year.

The Financial Services Authority (FSA) has been under pressure to change the FSCS funding system for several years, as increasing numbers of companies have complained they have been forced to pay disproportionately large levies.

The FSCS is a safety net which bails out consumers when financial services firms goes bust, paying out compensation of up to £48,000.

The scheme charges different levies to different sub-sectors of the financial services industry, based on the number of expected claims over the forthcoming year. However, trade bodies have complained that this creates an enormous variance in the size of the annual levy.

The FSA published a discussion paper yesterday, to be followed up with a full consultation later this year. Commenting on the review, David Kenmir, an FSA managing director, said: "We recognise it is not possible to devise funding arrangements which will command universal support. However, through an open and fair discussion process, we hope to design funding arrangements which apportion the cost of compensation between regulated firms as fairly as possible."

Loretta Minghella, the FSCS chief executive, said: "We need a funding structure that is sustainable, that smoothes volatility in compensation bills and provides sufficient funding to let us get on with the job we are here to do. We believe that sharing compensation costs across broader classes of firms in future will provide the fairest and most resilient system for the longer term."

The Association of British Insurers was one of the first to welcome the review, claiming the system forces its members to cross-subsidise intermediaries. Peter Vipond, the ABI's director of financial regulation and taxation, said: "We expect the FSA to address this problem through a mixture of how it defines contribution 'sub-classes' as well as a review of authorisation and financial resource rules."