PIA consults on proposed changes to the funding of compensation schemes - Consultative Paper 26

Following SIB Consultative Paper 112, entitled "Limit on Compensation Costs" which proposed to raise the limits which the ICS could pay in any one year from £100 million to £200 million, and a change in the method of calculating whether payments had reached those limits in order to ensure that the customers of defaulting firms did not miss out on compensation, the PIA has published its proposals on the implementation of these changes in a consultation paper.

This document contains four main proposals:

• The PIA proposes to replace the annual compensation levy limit of £100 million with a cumulative levy of £300 million. This would last for a period of 3 years. For example, if compensation was paid out at the rate of £100 million a year then this £300 million levy would last until 2001. It would remain possible for PIA to levy further amounts, but PIA considers that it is unlikely that it will need to exercise such a power. It is hoped that this figure would provide sufficient cover until the FSA introduces compensation funding arrangements for the whole financial services sector.
• It is proposed to amend the formula by which levies are allocated to product providers and IFAs. Currently, IFAs pay the first £5 million plus 10% of the balance up to a limit of £100 million (i.e. a maximum of £14.5 million). Product providers pay the rest of it. It is proposed that IFAs pay the first £5 million plus 10% of the balance up to a limit of £100 million (i.e. a maximum of £14.5 million). Product providers pay the rest of it. It is proposed that IFAs pay 15% of the compensation levy and product providers 85%. This means that IFAs wwould pay less (and product providers more) if the levy is below approximately £100 million, whereas IFAs will pay more (and product providers less) if the levy exceeds £100 million. This change will take effect on 1st April 1998 and PIA considers it to be equitable and simple.
• Quarterly levies PIA considers it important to ensure that the ICS is in funds to pay compensation. Given the rate at which it is expected claims will come in in relation to pension transfer work, PIA proposes to collect levies quarterly. This will affect cash flow rather than the overall financial burden.
• Resigning firms

PIA is asking for comments on whether it should impose a proportionate levy on resigning firms, which currently escape paying any portion of the levy for the year in which they resign.