Current scope of FSCS
The FSCS was set up under the Financial Services and Markets Act 2000. It became operational on 1 December 2001 and replaced eight previously existing financial services compensation schemes, including the Policyholders’ Protection Scheme. The scheme provides a system of compensation for various groups of consumers, in relation to particular financial products provided by firms authorised by the FSA. General insurance contracts are included, if they satisfy applicable criteria.
The amount the FSCS can pay out on claims relating to general insurance is unlimited, although it pays 100% of compulsory insurance claims only. For noncompulsory claims, it pays 100% of the first £2,000, then 90% of the remainder. The FSCS is funded by levies on FSA authorised firms. For levy purposes, the FSCS is split into five broad classes, including ‘general insurance’ and ‘life and pensions’. Within each broad class, there are subclasses of firms that engage in similar styles of business with similar types of customer. Firms have to submit statements annually of the total amount of business they conduct in each class.
The scheme covers “eligible claimants”. For insurance, this includes insureds who are private individuals and small businesses (those with annual turnover up to £1m). Larger businesses are also covered where the liability relates to compulsory insurance. The insurer must be in default, that is, it is insolvent or has been proved to be unable to pay its debts. Reinsurance, marine, aviation, transport business and credit insurance are not covered by the scheme.
Proposed extension of FSCS
The FSA proposes to extend the coverage of the FSCS to include European Economic Area (EEA) risks written under policies issued through EEA branches of UK insurers. These are currently excluded from the scheme. This amendment is intended to address inconsistency between the treatment of UK and EEA policyholders under the scheme. For example, an individual habitually resident in an EEA State other than the UK who takes out a life insurance contract through an EEA branch of a UK insurer will fall within the scope of the FSCS, provided that the other necessary conditions for the payment of compensation are met.
Implications for Lloyd’s
Lloyd’s became subject to the FSCS in 2004 (Lloyd’s is therefore not liable for pre-2004 insurance claims). This extension of the scheme would mean that Lloyd’s coverholder business in the EEA would be protected by the FSCS. In some EEA member states, there are no local insurance guarantee schemes; a Lloyd’s coverholder will therefore be able to offer insurance products that have an additional level of protection, that may not be available to local insurers. Lloyd’s has therefore responded to the FSA consultation in support of the extension of the FSCS to cover EEA risks written under policies issued through EEA branches of UK insurers. The change will mean that UK and EEA risks are treated in the same way as regards the eligibility for the FSCS.
