FSA 'must consider impact of FSCS levies on firms'

The Practitioner Panel has called on the government to force regulators to consider the impact of cross-subsidisation in the financial services compensation scheme (FSCS).

The current FSCS process of levying other ‘business types' once a compensation limit has been breached in one sector could cause firms to become financially unstable, it argued.

In January 2011, investment management firms were required to contribute £236m towards the cost of compensating investors who lost money in the collapse of Keydata.

This was because the claims went over the £100m limit of contributions allowed from the intermediary sector.

According to the Panel, which represents every section of the regulated community and advises the FSA on policy, the regulator should step in to assess the potential impact on some sectors when compensation payouts near their limits in others.

"The FSA has claimed it has no responsibility to consider the impact of FSCS levies on the finances of firms, as the decision to raise the levy is for the FSCS," the Panel said in its annual report.

"However, we continue to argue that the FSA should take an interest in the impact of levies when they are likely to cause other firms to become financially unstable.

"We suggested the government's regulatory changes provide an opportunity for this situation to be changed. The government could introduce a requirement on the regulator to consider the impact on those sectors affected by any contribution requests for the FSCS which go near the limits in future."

The Panel added it hoped the FSA's replacement organisation, the Financial Conduct Authority (FCA), would not "throw away" or rename FSA initiatives such as treating customers fairly (TCF).

"We do not want significant policies to be thrown away, only to be replaced with something similar, but with a different name," it said.

"Embedding TCF has been a massive undertaking for firms and it will take some time for such cultural shifts to show through."