Select Committee on Treasury Written Evidence

Letter from Chairman of the Financial Services Authority to the Chairman


  1.  I am writing to inform you of the decision of the FSA Board in respect of the new funding arrangements for the Financial Services Compensation Scheme (FSCS) resulting from our ongoing work under the Funding Review which started in 2005. At our Board meeting on 31 October 2007 we approved the final rules for the new funding model for the Financial Services Compensation Scheme.

  2.  The new funding model will include five broad classes: life and pensions; deposits; investment; general insurance and home finance. With the exception of the deposits class, each broad class will be divided into two sub-classes based on provider/intermediation activities. For the first item, we have introduced explicit cross-subsidy arrangements, so that sub-classes can pick up liabilities from other sectors if they need to. The new funding model is a step forward for the arrangements for the FSCS: making it more robust and resilient and substantially increasing the funding available to it to over £4 billion per annum.

  3.  Moving forward, we have set up a new project: Banking and Compensation Reform. This project will look at the work flowing from the Tripartite Discussion Paper "Banking Reform—protecting depositors", published in light of recent market events, including delivering the desired outcomes in a number of areas related to bank failure and insolvency. We will be reviewing the tools available to us in the event of a banking failure to provide appropriate consumer proctction and market confidence through financial stability and competitiveness.

  4.  In addition, we are pulling together a number of existing FSA workstreams in relation to the FSCS. This will include the work on tariff measures still outstanding from the Funding Review, as well as the FSCS Reform project (which has looked at speed of compensation payment and preliminary payments in the vent of failure of a deposit-taker), and existing work on tools for effective bank resolution and dealing with insolvency. The project will also look at the scope of the FSCS, as well as the limits payable for claims for each sector, which is a piece of work we feel should be brought forward from 2009.

  5.  We see this as a key strategic project for the FSA with challenging objectives, and we will of course, keep you informed of progress in this area. We will be submitting evidence to the Treasury Committee on 11 December 2007, when we will be happy to elaborate on this further.

13 November 2007

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