In March 2006 the FSA published Discussion Paper 06/1: FSCS funding review. DP06/1 outlined the FSA's concerns regarding the current funding scheme arrangements.

The FSA has now published Consultation Paper 07/5: Financial Services Compensation Scheme Funding Review - Including feedback on DP06/1 (CP07/5). CP07/5 puts forward the FSA’s proposals to reform the funding arrangements of the Financial Services Compensation Scheme (FSCS). The FSCS is funded by compulsory contributions from UK authorised persons. The proposals put forward in CP07/5 will affect authorised persons and UK consumers of financial services.

The FSA's key proposals in CP07/5 are:

  • An expansion of the overall financial capacity of the compensation scheme.
  • The introduction of a 'widening circle' model of funding, under which the first tranche of compensation costs emerging from a particular group of firms is borne by that group alone, while costs above a specified threshold are shared out more widely.
  • The change to some of the criteria (the tariff measures) with effect from 1 April 2009 by reference to which contributions are calculated, so that each firm's contributions are proportionate to the degree of its involvement in the sector required to bear the compensation costs in question.
  • To bring the new funding arrangements, with appropriate transitional arrangements including some minor tariff changes, into effect from 1 April 2008.

The consultation closes on 20 June 2007.

The FSA aims to make its final rules, subject to the responses to CP07/5, in September 2007 with a Policy Statement in October 2007. The proposed model, if approved by the FSA Board, will be implemented from 1 April 2008.

The FSA also advises that detailed proposals for the wholesale sector will be presented in its FSCS Funding Review Supplementary Consultation Paper in around six months time. This Consultation Paper will also include a formal consultation on the tariff measure changes envisaged for 1 April 2009.

The FSA will also contact certain firms later this year to start collecting new information on existing tariff measures so that it can undertake some modelling of indicative levy rates that it will publish in next year’s Fees and Levies Consultation Paper.