Consumers who fall into the Financial Services Compensation Scheme could receive a maximum potential compensation of £48,000 should a mortgage or insurance intermediary firm collapse - the same as a claim for an investment firm.
Details of Consultation paper 04/04 - entitled Mortgage firms and insurance intermediaries: Funding of the Ombudsman and Compensation schemes - state mortgage advising and arranging is covered under the FSCS for 100% of the first £30,000 and 90% of the next £20,000, presenting a maximum compensation of £48,000.
That range of compensation is widened, however, under the general insurance rules as general insurance mediation is treated the same as protection insurance contracts, receiving 11% of the first £2000 and 90% of the remainder, except where they are compulsory classes of insurance and therefore eligible for 100% of the claim.
While this might seem straightforward, the FSA points out there may be cases where consumers could receive no compensation at all in cases where one broker passes the business to another.
Insurance advice, for example, is more likely to see more than one adviser in the chain between the consumer and the provider, as Broker A may pass its client business premia paid to retail Broker B.
Difficulty arises if be broker B later goes out of business and is eventually found to owe clients some form of compensation for uninsured losses as a result of their Broker B’s incompetence.
The FSA points out in these scenarios, the consumer will only be able to make a compensation claim if it can be proven Broker A failed in its duty to exercise proper care when selecting the intermediate broker (B).
This is because one of the conditions of payment by the FSCS regime is it must be seen to be owed a civil liability.
Instead, the link between consumer, broker A and broker B instead suggests the only people eligible for compensation is broker A, because the client did not have direct contact with broker B.
Any claims for mortgage of general insurance compensation through the Financial Ombudsman Service – will be financed by two "industry funding blocks" for mortgage and general insurance advice, which in turn divides any levy and fee payments into separate funding blocks, suggests the FSA.
Most categories of regulated adviser or firm are already divided into FSA funding blocks, depending on the type and size of firm.
Instead of paying a general levy to cover the base costs, specific costs and compensation costs of the FOS, says the FSA, mortgage firms and general insurance intermediaries will not be subject to a fee for the first two cases submitted to the FOS each year but will be asked to pay a special case fee of £550 per case thereafter.
The FSA will then consider a levy and annual tariff base for 2005/06, based on the annual income of individual mortgage and general insurance firms.
Advisers have the option of reporting a tailored income figure to more accurately reflect the proportion of their business undertaken with eligible claimants, says the FSA, but will not be collected until 2005/06.
Consultation on the FOS and FSCS funding will close on 2 July 2004 ahead of mortgage regulation starting on 31 October 2004.IFAonline
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