Treasury proposes ending FSCS levy cross-subsidy

The Treasury is proposing setting up separate compensation schemes and ending the current cross-subsidy between different classes of FSCS levy payers.

Its proposal is part of a wider consultation launched today by financial secretary to the Treasury, Mark Hoban MP, on the implementation of financial regulation reforms including the split of the FSA.

The FSCS would span both sides of the new structure which is divided into the Prudential Regulation Authority (PRA) and Consumer Protection and Markets Authority (CPMA).

The Treasury says the FSCS's core business of compensating consumers for the more frequent failures of small firms, such as IFAs, fits within the remit of the CPMA.

However, the role of the FSCS in the event of a failure of a bank, insurer or investment bank means there is also a clear link with the work of the PRA.

The paper says one way to recognise these differing roles under the new system would be for the PRA and the CPMA to make rules relating to compensation and levies for the different classes of firm which they regulate.

This would involve setting up separate compensation schemes and ending the current cross-subsidy between different classes of levy payers (under which investment firms or insurers have to contribute to the failure of banks, and vice versa).

Under this model, it may nevertheless be appropriate for a single organisation, such as the FSCS, to continue to administer all compensation schemes, it says.

Alternatively, another proposal would be the FSCS remaining a single scheme under the remit of the CPMA, who would make all of their rules, including on levies.

The consultation into these and other proposals will close on 18 October 2010.