FSCS levy hike hides real issue for brokers

The recent announcement by the FSA that it was to consult the market on proposed changes to the way the FSCS levy is administered has caused plenty of gnashing of teeth among the general insurance broking community. Not least because it proposes to increase the financial cap of the intermediated sub-class by 50% to £300m.

Basically, that means that brokers will have to stump up a huge amount more in their annual FSCS levy contributions. As you’d expect, brokers are less than happy with this arguing that they are being forced to pay for the misdeeds of other sectors.

In fact, some argue that having to find this extra cash in already difficult financial times could push some brokers over the edge into insolvency. Indeed, modelling of the impact of this upon ‘stylised firms’ published as part of the consultation paper, predicts that nearly 300 broking firms would become unprofitable as a result of the hike.

Brokers getting upset about FSCS levy rises is nothing new – it’s been going on for years with particular fury reserved for firms that went bust following the miss-selling of PPI. As companies went bust under the weight of claims against them, (they were part of the broker compensation fund), general insurance brokers found themselves stumping up extra cash to ensure that affected customers were compensated.

No-one is suggesting that the FSCS is not a good thing. It patently is but what is being questioned is the fairness of it all. Biba has engaged its lawyers and consultants to put together a defence against the proposed increase. We’ve seen all this before when the FSCS imposed interim levies to make up shortfalls and brokers called foul then too so there is nothing necessarily new here.

Except there might just be something different going on here. The FSA’s priority is to ensure that customers are not left out of pocket if and when a firm goes bust. With PPI claims appearing to have spiked and look to be on their way down in terms of frequency and volume, brokers are asking why the FSA suddenly wants such a huge increase in contributions to the broker fund.

Consider this. The OFT’s investigation into the sale of add-ons has been passed on to the FSA and although no details of the findings have been revealed, it could be that the regulator has found early signs of miss-selling in this space. As general insurance brokers have been heavily involved in selling add-on products, it could be that the FSA is preparing itself for a slew of claims from customers on the basis they were miss-sold products.

That could explain the sharp hike in required contributions. Perhaps those that said the investigation into the sale of add-ons could turn out to be the broker version of the PPI scandal were right and the FSA is simply trying to ensure the market is in as good a position as possible to handle the inevitable claims.

It could be that this most recent increase in levy contributions is just the beginning of a much wider and protracted issue for brokers. As the regulator tends to do things for a reason, brokers should be looking past the cost of the levy hike and consider the bigger picture. The levy hike could turn out to be just the beginning.