In the feedback today, the FCA said it received a large number of responses suggesting that FSCS compensation costs should be met from monies raised through financial penalties imposed further to enforcement investigations.
Respondents considered that this would be closer to a ‘polluter pays’ model – where firms that are responsible for some misconduct or other failing are required to contribute more to the cost of failed firms.
“We agree in principle with many firms’ desire for riskier firms to meet more of the cost of FSCS claims, but there are practical difficulties with this,” the FCA said.
“FSCS compensation costs typically arise from events several years in the past, making it hard to predict (with the certainty that would be needed to be the basis of risk-based levy calculations) which business models will give rise to future costs.
“The difficulties involved in doing this accurately means that it would not represent a ‘polluter pays’ model. Instead, it would represent a model that involves us trying to align current business models with the business models of historic firms – which would be an imperfect and likely contentious process.”
The FCA said where it suspects that certain business models are riskier, that should be something it addresses straight away - before the business causes harm - rather than anticipating harm that would give rise to future levies.
The City watchdog discussed these complexities and noted the difficulties of introducing a risk-based funding model, and also with other alternative models such as a pre-fund or a product levy.
“We therefore do not consider it appropriate to seek to introduce a risk-based funding model at this time,” it said.
“We have also not heard any views through the feedback received that other funding models, such as a pre-fund or product levy, would be preferable to the current funding arrangements.”
The FCA said it acknowledges that many stakeholders are in favour of the use of FCA financial penalties to fund FSCS compensation costs.
“Since 2012 monies raised through FCA financial penalties collected by the FCA have been paid to the Exchequer’s Consolidated Fund,” it said.
“Therefore, how these monies are used is for the Government to determine. Accordingly, we have highlighted to the Government the strength of feeling on this matter.”
HNWs will continue to have FSCS access
In the discussion paper, the FCA had said high-net-worth or sophisticated investors could be barred from claiming compensation through the regulatory channels.
It asked the industry whether high net-worth or sophisticated investors should be excluded from claiming compensation from the FSCS in certain situations.
