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UK insurers face bigger compensation pot contribution
October 30, 2017 / 1:06 PM / 22 days ago

UK insurers face bigger compensation pot contribution

LONDON, Oct 30 (Reuters) - Britain’s markets watchdog flagged a shift on Monday towards a “polluter pays” model of compensation by forcing insurers to pay more into a pot for consumers out of pocket.

The Financial Conduct Authority (FCA) opened a public consultation on proposals that would force firms that design risky products to put more cash into the Financial Services Compensation Scheme (FSCS).

The scheme is funded by a levy on financial firms, with the size of the levy generally corresponding to the size of the firm rather than actual risks it poses.

This year’s levy totals 353 million pounds. Much of the recent pressure on the FSCS has come from claims in the life insurance, pensions and investment advice sectors.

The FCA is proposing to force firms that design financial products to contribute more towards compensation costs stemming from sales through “intermediaries” like financial advisors. The aim is to put pressure on product providers to make sure they scrutinise outside advisors who sell their products.

This and other proposed changes will affect which parts of the financial sector pay into the pot.

“This proposal makes general insurance providers potentially liable for more of the compensation bill than before,” the FCA said.

The watchdog also proposes raising the compensation limit for advisors and debt management claims to 85,000 pounds from 50,000 pounds.

This has been prompted by new “pension freedoms” that allow people to cash in their pension pots and seek advice on putting the money into potentially riskier products, the FCA said.

The FCA issued final rules that come into force in April 2018 following a public consultation launched last December.

New reporting requirements will allow the watchdog to tailor levies to the level of risk from a product or company, if it decided to take this step as part of a “polluter pays” push.

The scheme’s coverage will be extended to some aspects of fund management, and to certain debt management activities for the first time. The Lloyd’s of London insurance market is also forced to contribute to the scheme’s retail pot.

The FCA said it won’t intervene to change professional indemnity insurance coverage terms for advisors, saying the markets is working well.

Instead it is consulting on whether to force advisors to hold capital in trust or obtain a surety bond to cover possible compensation claims.

The watchdog also ditched the idea of bringing the loan-based crowdfunding sector under the FSCS as it was impractical. ($1 = 0.7585 pounds) (Reporting by Huw Jones, editing by David Evans)

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