So another blog in an already crowded e-market place. Why should you read this one? Well, one possible reason is FSCS does matter to the industry.
By protecting consumers against failure, we underpin confidence in the industry and its products. It’s important not just to us, but also to you, that FSCS is providing a responsive service which consumers know about and trust. The great majority of consumers who use our service do trust us. But there’s much more to do to raise awareness of our protection among consumers generally. I’ll come back to that in future blogs.
Another reason we matter to you is that you pay for us. We levy the industry to meet the costs of compensation and our own running costs.
So you have a big interest in whether we’re efficient and whether, as the creditor of failed businesses, we’re recovering the maximum we can to offset the costs we impose on the industry.
My commitment is to be as transparent as possible on both counts. That’s why we hold quarterly meetings with all the main trade bodies and publish our “Outlook” bulletin regularly.
But I thought you might also welcome a more personal take on what we’re doing and why: hence this blog.
That brings me to my theme for this month: how FSCS is funded.
One inescapable truth is that large parts of the industry are unhappy with FSCS’ current funding model. Pay-as-you-go levies are unpredictable and difficult to budget for. How could they not be when failure is also unpredictable?
Many businesses also think the current cross-subsidy arrangements for pooling the costs of big failures across the industry are unfair because they lead to low risk businesses paying for higher risk ones.
I think this unhappiness with our funding arrangements matters because FSCS needs to retain the industry’s support. That’s why we have been big supporters of the Review which FSA launched at the end of July.
So what do I want out of the Review?
First, I want to be sure that FSCS has access to the money it needs to meet compensation costs. Our first duty is to consumers who’ve lost money and have legitimate claims. Fail in that duty and we fail to provide the reassurance so important to the industry itself.
Second, I want to see if we can find an approach to funding FSCS which commands wider confidence and support across the industry.
Now I’m not naïve: this is a zero sum game. We can only distribute costs differently, not magic them away.
I do, however, think we need to be open-minded about how costs are distributed and we need the industry to be clear in its views in responding to FSA.
Would you, for example, prefer to spread the costs of big failures over time rather than horizontally across the industry? If so, we should take a fresh look at pre-funding.
Pre-funding has drawbacks. It means taking capital out of the industry before FSCS needs it. And the transition to a pre-fund would be tricky.
But contributions to pre-funds would be predictable and failing businesses would have contributed to the cost of clearing up after them through the pre-fund. There would be no – or much reduced – need for any cross-subsidy between sectors.
So how you do see this trade-off?
Whether we move to pre-funding or stick with pay-as-you-go levies, I also think we should take a fresh look at whether businesses’ liabilities to contribute to FSCS’ costs could reflect the risk they present.
The key here is to find an objective basis for assessing risk which really does predict the likelihood of firm failure.
If the industry sees virtue in “risk-weighting”, we need you to suggest what that basis might be.
These are not the only issues, of course. There are many others. But I do encourage the industry to make its views on the big choices clear to FSA. That’s what the review is for.