* FCA wants scheme levies to better reflect risks
* FCA says scheme must not be "first line of defence"
* FCA wants to widen scope of scheme in asset management
* 50,000 pound limit on claims could increase to 1 million (Adds reaction)
By Huw Jones
LONDON, Dec 14 (Reuters) - Firms offering riskier products should pay higher levies to a fund used to compensate consumers of pensions, credit and investment funds, Britain's financial watchdog said in proposals published on Wednesday.
The Financial Conduct Authority said it was reviewing how the 3.5 billion pound ($4.4 billion) Financial Services Compensation Scheme (FSCS) is financed after a sharp rise in levies for some firms.
A 50,000 pound limit on claims could be increased to as much as 1 million pounds, it said.
The scheme paid consumers 271 million pounds in compensation in the year to March, and received more than 46,000 new claims.
The FCA wants to widen the scope of levies, forcing firms to do more to compensate customers so that the scheme is "not the first line of defence when a firm fails".
It will review the professional indemnity insurance market in the first half of 2017 to see if this insurance could be used to cover more of the claims and wants to begin collecting extra data from firms before deciding whether to set levies based on risks posed by firms and individual products.
These two initiatives would enable the FCA to move towards a "polluter pays" approach, meaning those who pose greatest risks contribute the highest levies.
The Association of Professional Financial Advisers said the proposals were a step forward but it was disappointed that it will take so long to bring this into force.
For the first time, the FCA has proposed that firms that provide products to intermediaries should make contributions when those intermediaries fail.
Britain has made sweeping changes to its pensions market, allowing older people to cash in their pension pots to invest in alternatives.
The watchdog is looking at whether to increase the 50,000 pound limit on claims relating to sales of life, pension and investment products in light of these pension freedoms.
It also wants to extend the scheme's coverage for some aspects of fund management, and introducing it for debt management.
The FCA also proposes that the Lloyd's of London insurance markets contributes to the scheme's retail pool.
New rules on extending the scope of the scheme to debt management and other areas would come into effect in the 2018-19 financial year.
Final rules on professional indemnity insurance and compensation limits would be made in the first half of 2018, with the new funding structure in place for the 2019-20 financial year. ($1 = 0.7910 pounds) (Editing by Alexander Smith and Adrian Croft)