The Treasury today proposes reforming the way the Financial Services Compensation Scheme (FSCS) is funded and announces a wide-ranging review of the role of the Financial Ombudsman Service (FOS) in a white paper suggesting a raft of dramatic changes to the banking sector.
In Reforming Financial Markets, it says a pre-funding arrangement that would see the industry contribute to the costs of the FSCS before a major failure occurs, rather than pay for it via raised levies after the event, may be better suited given the market events of the last 18 months.
It says the arrangement would only affect the deposit-taking class, would not be introduced until 2012, and pledged initial levies would "not be set at a level which would compromise financial stability".
Meanwhile, it says this is also an "appropriate" time to review the "governance and accountability" of the FOS, which handles millions of enquiries and settles hundreds of thousands of disputes between consumers and businesses every year.
The paper says the Treasury and the FSA will conduct a review of the FOS, reporting back at the end of the year, but promises any resulting proposals will not undermine its independence and role in the regulatory system.
The FOS has also decided that, subject to stakeholders' views, its next three-year review will cover its efficiency and effectiveness - similar to the 2007 review of the FSA that the Treasury commissioned from the National Audit Office.
On the issue of pre-funding the FSCS, the Treasury says its advantages are that it allows the costs to be spread over an even longer period of time than a post-failure borrowing facility would do on its own. It argues pre-funding would also have a counter-cyclical effect.
The white paper says the bank failures of recent months have proven expensive, adding the FSCS has been unable to meet the full costs of a substantial failure immediately by raising levies from the industry.
It says, consequently, the Government has had to step in, lending the FSCS the money it needs at an appropriate rate of interest, to ensure that this does not amount to a subsidy to the industry.
Pre-funding would, the paper argues, put an end to such hasty and expensive arrangements by spreading the cost and leaving the FSCS in a well-prepared state.
