MIGI 18.1 The Financial Services Compensation Scheme (FSCS)

We are required by the Actto establish a scheme for compensating consumers when authorised firms are unable, or are unlikely to be able, to satisfy claims against them. The body established to operate and administer the compensation scheme is the Financial Services Compensation Scheme Ltd (FSCS). The relevant FSA rules are in the Compensation sourcebook (COMP).

The application of the FSCS will be extended to include mortgage and insurance intermediaries. We have not yet finalised all our rules on how the FSCS will apply to mortgage and insurance intermediaries. We are currently consulting on the detailed funding arrangements for the FSCS in respect of mortgage and insurance intermediaries in CP 04/4 So, we plan to update this Chapter later in the year when we have finalised our rules.

If an authorised mortgage or insurance intermediary fails and it is unable to meet its obligations to its customers, then eligible claimants can seek compensation from the FSCS for their losses. The protection provided would broadly cover two types of situation where a firm has failed. The first covers the risk that the intermediary is holding a premium that it has not passed to the insurer or money from a paid claim is being held. The second situation covers mis-selling or bad advice given by the intermediary.

For a claimant to receive compensation from the FSCS in relation to insurance or mortgage mediation carried on by an authorised firm, three criteria must be satisfied:

1. (1)

   the claimant must be eligible (broadly speaking, cover is limited to private individuals and small businesses) (COMP 4.2);

2. (2)

   the claim must be against an authorised firm that is unable, or likely to be unable, to satisfy claims against it (broadly speaking, insolvent); and

3. (3)

   it must be a 'protected' claim, that is to say that the claim must be in respect of a non-investment insurance contract or regulated mortgage contract (COMP 5.2.1 R).

The compensation limit for insurance mediation where the intermediary fails is 100% of the first £2,000 and 90% of the remainder and 100% for compulsory classes of insurance (COMP 10.2.3 R). (There are further details about what is compulsory insurance in the Handbook Glossary under the definition 'liability subject to compulsory insurance'.)

The compensation limit for mortgage mediation is 100% of the first £30,000 and 90% of the next £20,000, making the maximum compensation £48,000 (COMP 10.2.3 R).

The FSCS is funded by contributions from authorised firms. So, in addition to their FSA fees (see Part I, Chapter 19) authorised mortgage and insurance intermediaries will need to pay annual contributions to the FSCS. We are currently consulting on the detailed funding arrangements for the FSCS for mortgage and insurance intermediaries in CP 04/4.