The Association of Independent Financial Advisers (AIFA) has set out plans to the Treasury on how regulatory fines could be used to transition the Financial Services Compensation Scheme (FSCS) to a pre-funded system.
Earlier this week, IFAonline reported on how the trade body was urging the chancellor to rethink plans to redirect fines to the Exchequer, in the wake of the Barclays Libor scandal.
Although he accepted it may be unpalatable for fines to be used to offset fees for other firms, the current system, AIFA policy director Chris Hannant suggested they could be used to fund the FSCS.
In a letter from AIFA chairman Lord Deben to the George Osborne yesterday, the organisation set out more details on this, and how it could tie in with European proposals for pre-funded schemes.
"The fines could be used to establish a prefund, mitigating the burden on firms and help to ensure secure compensation arrangements and a strong and healthy sector," he explained.
"In the event that prefunding is not an option at the current time, we still believe that there is a strong argument for maintaining a link between the amounts raised by way of fines and consumer benefit.
"That way, firms found guilty of wrong doing will be helping, and be seen to be helping, the customers of the financial services industry."
One of the arguments against pre-funding has previously been that there would be a significant burden on firms to pay for the establishment of the funds in the first place, coming on top other regulatory costs.
However, as Lord Deben explained to Osborne, it could also correct some of the anomalies of the existing system.
"It provides certainty for consumers, who know the money is available to pay claims if required, and predictability for firms, who know how much they are expected to pay each year," he wrote.
"Furthermore, firms that fail will have paid into the prefund while they were authorised and hence will contribute towards the cost of compensation for their customers."
Read the full letter from AIFA to George Osborne HERE
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