The FSA is about to take on a very important task - reforming the funding arrangements for the Financial Services Compensation Scheme.
This scheme pays consumers when a firm goes into default owing them money. It's the industry that foots the bill for the scheme's compensation payments - so the key questions are who pays and how much.
This is of crucial importance to the fund management industry because we recently found ourselves on the receiving end of a bill for more than £200m following the demise of a purveyor of investments into second-hand life insurance policies. This is an extraordinary amount to pay for something with no connection to the industry.
Some firms had to meet wholly unexpected bills of more than £10m each - hardly a good advertisement for London as an attractive and competitive place for global firms to do business.
Reforming the funding arrangements for the FSCS
Now it seems it could happen again. Although the confirmed compensation claims against "investment intermediaries" in the current year are so far modest by recent standards, new cases have been coming through thick and fast. Once total compensation goes over £100m, fund managers are first in line to fund the excess (which is how the previous claim came about).
All the signs are that this will be a distinct possibility, with the culprits this time including spread betting firms.
Now traded life policies and spread betting have nothing to do with fund management, and it is manifestly unjust that fund managers, and fund managers alone, should be liable to cross-subsidise these compensation costs. (One could say exactly the same, by the way, about IFAs who, as "investment intermediaries" themselves, have to meet these costs directly.)
It would be much fairer, given that we cannot expect the taxpayer to meet the compensation costs, to spread them across all financial services firms when providers of more exotic products go down.
But a problem is looming. The Financial Services Bill, currently before Parliament, which replaces the FSA with two new regulators, the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA), provides that in future the scheme's rules will be made by the two jointly. Some rules will be written by the PRA and others by the FCA.
I have been warning the Treasury and FSA for more than a year that this will effectively result in two schemes. And if the banks and insurers (who will be regulated by the PRA) are taken out of the FCA part of the scheme, that could mean that fund managers will find themselves facing even bigger liabilities than under the present unjust arrangements.
The FSA will shortly be finalising the proposals on which it will consult. The regulator needs to be in no doubt that such an outcome would be a travesty, and it would face a storm of protest from the fund management industry.
The aim of the review should be to correct the injustices in the present scheme, not make them worse. I hope the FSA will pay heed.
Richard Saunders, chief executive, IMA
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