FSA to bring EEA branches of UK insurers within compensation scheme

The Scheme pays compensation to eligible customers of authorised financial services firms if the firm is unable or likely to be unable to pay claims against it. This includes claims against insurers and, since January 2005, insurance brokers.

In January 2008, the scheme reported that it had paid out £1 billion in compensation to consumers since it was set up in December 2001. It predicts that it will receive about 11,000 new claims in 2008/9 across the full range of financial services.

There is, though, an anomaly in the way the scheme deals with some insurance-related claims.

Under current rules, if an insurance policy is issued by a UK insurer via a branch in another EEA state and covers a UK-based risk, it falls within the scheme. But if it covers a risk based in another EEA state, it does not.

The FSA wants to remedy this as soon as possible by amending the scope of the FSCS so that UK and EEA risks written under long-term or general insurance policies issued through EEA branches of UK insurers will be treated in the same way.

A consultation paper setting out its proposals was published last week. The FSA has imposed an abbreviated one-month time limit for responses (until 9th June) in the hope that the new rules can be finalised in July this year.

The FSA does not believe the change will result in a significant amount of additional EEA branch business falling within the scheme, so it is not planning any consequential changes to the new funding arrangements which came into force on 1st April.

These introduced cross-subsidies across business classes for the first time. The FSCS is now divided into five classes: life and pensions; investments; general insurance; deposits; and home finance. Each of these (except deposits) is divided into two sub-classes for providers and intermediaries.

Each class meets the compensation costs associated with firms in that class, up to a certain threshold. But above that level, costs are met by a general retail pool to which all the classes contribute. As a result, in the case of serious default, firms in one class could find themselves contributing to the liabilities of firms in a different industry sector.