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The Financial Services Compensation Scheme (FSCS) has, until this year had only a limited impact on general insurance brokers. As most of you already know, that’s no longer the case!

Intended to provide a safety net for those who were denied legitimate compensation as a result of the financial failure of regulated firms (be they banks, insurers or intermediaries) the FSCS has been fairly low on most broker’s agenda – simply because of the relatively small levies that have been imposed thus far. For example, in 2008/9 the levy for the whole intermediary population was just £1.6m.

However, it’s suddenly taken on a whole new significance with the 2010/11 levy a whopping £61m – some 38 times higher than 2008/9. This is mainly down to the hike in the number of PPI (payment protection insurance) mis-selling claims being handled by the FSCS, particularly claims against single premium policies which the FSA outlawed a while ago. These policies were largely sold by credit brokers who have closed their doors, leaving the FSCS to pick up the tab. And, because these ‘secondary’ intermediaries are lumped in with the professional insurance broker community as far as compensation funding is concerned, we are the ones being asked to foot the bill.

I have to question the FSA’s timing – why focus on PPI mis-selling right in the middle of the worst recession in living memory, at just the time when many policyholders might have more need of the cover however it was sold.  Not only that, but the inevitable collateral damage which the adverse publicity will have caused to the image of all PPI cover is enormous. Many prospective customers will undoubtedly have been put off buying cover at all now, leaving the state to yet again provide the safety net.  Let’s face it - the issue of inappropriately sold PPI cover has been around for a very long time – we all knew what was going on, so why did it take the FSA so long to get its act together?  Another argument for an ‘insurance tsar’ to regulate our industry. But I digress….

The worrying thing is that, when it comes to the number of PPI complainants that are likely to materialise, we’ve thus far barely scratched the surface. Consider this telling statistic; the recently issued FOS annual report shows a 58% year on year increase in PPI complaints (49,196 in the last year) with 89% of these complaints upheld.

Let’s just take one live example.  Picture Finance was a credit broker which has now ceased trading.  During their time they sold approximately 15,000 single premium PPI policies at an average premium of approximately £12,000. If, say 50% of policyholders claim they were ‘mis-sold’ (and bearing in mind the FOS is upholding 89% of complaints) that’s a whopping £900m in compensation just for this one firm! Like Picture Finance, many of the sellers are no longer in business, so it’s the FSCS that is left to pick up the tab. Clearly there is a lot worse to come.

Thankfully the FSCS levy does have a cap – for insurance intermediation that’s set at £195m in any one year. The evidence suggests that this will be the level of funding that we’ll be expected to ‘stump up’ for many years to come, unless something changes.

The financial impact on an individual firm depends upon their level of ‘qualifying premium’.  However, in broad terms if your qualifying premium is say £3m then you can expect an annual levy from 2011/12 of around £11,000 each year for the foreseeable future, and that’s just to cover the PPI position. There is also the spectre of a further call on all FSCS contributors to pay for the banks’ bail out by the government.

Every insurance broker with whom I’ve discussed this is indignant about the inequitable nature of the levy – the vast majority having never sold a single premium PPI policy to anyone – in fact very few insurance brokers sell payment protection insurance of any type.

The FSA has already agreed to undertake a fundamental review of the FSCS funding model and hopes to issue a consultation paper by the end of the year. This is a golden opportunity to get our point across and press for a separate designation of insurance broker, away from other ‘secondary’ players. However, be warned - this review will only address how compensation is funded, and not the current limits, and even if changed, any new rules won’t apply until April 2012. So we seem to be stuck with the likelihood of a substantial levy for at least one more year. Not very fair, is it?

Grant Ellis

Chairman

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