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Financial Services and Markets Act 2000

March 2001


The Transition to the New Compensation Scheme - A Consultation Document

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PART III - FUNDING

Transfer of assets, rights, and liabilities

3.1      The Order enables the FSCS to levy authorised persons for costs incurred after N2 in respect of transitional applications, article 9 defaults, and claims made pursuant to article 11.  None of the provisions of the former schemes that enable levies to be imposed will have effect after N2; after N2 all levies will be made pursuant to rules made by the FSA under FSMA.

 3.2      Article 12 provides for the transfer of funds held by the DPS, BSIPS, and PPS to the FSCS at N2. Other assets, rights, and liabilities will be passed to FSCS when the DPS, BSIPS and the PPS are dissolved. Article 13 of the Order requires the FSCS, as soon as is practicable after N2, to review the funds it has received from the former schemes.  If the FSCS decide at any time that any of the funds transferred to it are in excess of what it needs to meet the actual or anticipated cost of compensation payments in relation to article 9 defaults or claims made pursuant to article 11 of the Order then it may make repayments from those funds to persons, in such amounts as the FSCS considers fair and equitable, having regard to contributions made by such persons to the funds in question. In other words, if FSCS considers that there is no need to retain the funds, or any part thereof, transferred from the former schemes to pay claims, it may return that money to those who paid it.  This may be appropriate where the transferred funds represent many years worth of expected claims.   

3.3       The Order also specifies, in article 15 how funds transferred from former schemes to FSCS can be used.  Such funds can be used to meet costs of both pre-N2 and post-N2 claims.  Funds transferred from the DPS and BSIPS that are not repaid can only be used to meet claims in respect of the regulated activity of deposit taking. Funds transferred from the PPS that were originally collected under the general business levy can only be used to meet claims made with respect to general insurance business. Similarly, levies collected under the long-term business levy can only be used to meet claims made with respect to long term insurance business.

3.4       The Order makes no provision concerning the transfer of funds, assets, and liabilities from the ICS, the Section 43 scheme, the PIA Indemnity Scheme, or the FSPS. It is our view that it should be left to these former schemes to agree the transfer of any funds held at commencement to the FSCS. As the scheme manager will be able to impose levies in respect of transitional applications, article 9 defaults and claims made pursuant to article 11, by way of rules made under article 17, the  FSCS will be able to make compensation payments even before the former schemes agree to a transfer of funds. It will, however, be in the interest of members of the schemes to agree a transfer of funds to the new scheme as rapidly as possible as this will mean that they will not have to pay a levy to FSCS where sufficient funds have already been raised by way of levy under a former scheme. But this will not mean that a firm will have been levied twice in respect of the same costs. If a former scheme cannot agree to pass funds to FSCS at commencement, it will be able redistribute any funds to those firms who contributed to it, but it is likely to be more cost effective for the former schemes to agree to pass funds held at N2 to the FSCS.

3.5       Question 2 - Comments are invited from on the proposed treatment of funds transferred from former schemes to the FSCS at N2.  In particular comments on the desirability of a review and the practicability of repaying transferred funds would be welcome.

3.6       Question 3 - Comments are invited on our proposed approach to meet post-N2 costs associated with satisfying transitional applications, article 9  defaults, and securing continuity of measures?