The Financial Services Compensation Scheme’s (FSCS) funding model has come under fire for causing protection and insurance intermediaries to bail out other ‘mismanaged’ firms.
Branko Bjelobaba, principal at consultancy Branko, spoke to Health & Protection in the wake of the Financial Conduct Authority’s (FCA) publication of regulated fees and levies for 2021/22.
After reviewing the document, Bjelobaba (pictured) accused the FCA of ‘charging what they like’, leaving regulated firms no choice but to ‘cough up’.
“What is causing huge concern is the need for the FSCS to tap up this class of firm as the Life Distribution and Investment Intermediation (LDII) and Investment Provision classes have burnt their silo of compensation funding,” he said.
“The 2020/21 total compensation costs for the LDII class hit £368m, driven in part by rising pension claims and by pay outs to clients of collapsed mini-bond businesses.
“In its annual plan and budget, the FSCS said the actual costs of funding compensation for clients of collapsed businesses is expected to be £361m. As a result, this has generated a funding overspill into the retail pool, and ultimately a major call for additional funding from the GI distribution sub-class that the protection insurance sector is merged with.”
Quoting figures from an analysis by the British Insurance Brokers Association (BIBA), Bjelobaba says the impact of the FSCS’s current financial model has resulted in insurance intermediaries £14m contribution increasing by a further £132m for the financial year 2021/22.
“This means that insurance firms are being asked to bail out the mismanagement of other regulated firms and some are experiencing an increase of some 300%. This is so unfair and unjust and cannot be budgeted for by firms,” he added.
“The FCA needs to consider how this is fair or proportionate, plus the massive increases to professional indemnity insurance which has resulted in significant increases in premium of up to and beyond 70%, not to mention the other significant costs encountered dealing with the pandemic.”
Health & Protection contacted the Financial Conduct Authority for comment but had not received a response by deadline.