New FSCS rules to drive up levies

Among a raft of new rules proposed today by the Financial Services Authority (FSA) is a simplification of eligibility criteria, extending it to:

• directors and managers of the firm in default

• close relatives of these directors and managers

• auditors of the firm in default or of any body corporate in the same group as the firm or any actuary appointed under SUP 4 in the Supervision sourcebook by a friendly society or insurance undertaking

• persons who have contributed to the default

• persons holding 5% or more of the capital of the firm

The FSCS said: "Given this proposal will increase the number of claimants eligible for compensation if a firm fails, it will increase compensation costs. In effect this increase in compensation costs is a transfer from levy payers to the customers of the failed firm.

"Over time, the firms that pay the levies may pass them on to their customers (for example, via higher charges)."

Another key proposal would give the FSCS the power to pay compensation to consumers where there is uncertainty about the value of an investment, for example because it is illiquid.

Under current rules, compensation must be assessed on the basis of legal liability and, although it anticipates instances where the new powers need to be used will be rare, it cited recent "complex structured investment products" where current rules were not adequate.

Another new power will give the FSCS the ability to pay compensation without a full investigation "if the costs of investigation are disproportionate to the benefits".

The FSA is also proposing to give the FSCS the option of taking an automatic assignment of a claimant's rights against the failed firm, and paying compensation for a shortfall in client money to a firm that has taken over the business of the failed firm.

Consultation on the proposals will close on 26 June and the FSA will provide feedback by the end of September.