The International Underwriting Association has welcomed a decision not to push ahead with a proposed change in the Financial Services Compensation Scheme (FSCS). Under plans to increase the scope of the scheme, the Prudential Regulation Authority (PRA) had considered changing the definition of ‘small business’.
The IUA argued that such a move would drastically change the mutualisation of risk within the UK insurance market. Since the current definition is considered to already include the vast majority of small and medium-sized enterprises, an expansion in scope would only extend the scheme to firms likely to have the financial and legal resources not to require its protection.
The IUA’s response to the proposal also highlighted possible unintended consequences for insurance operations classified as third country branches in the UK. Such companies are authorised on the basis of having up to £500m worth of FSCS liabilities. If this threshold were not adjusted, any major increase in the scope of the compensation scheme could require third country branches to be re-authorised as subsidiaries overnight.
Now the PRA has confirmed it will not change its definition of ‘small business’.
Helen Dalziel, Director of Public Policy at the IUA said: “Very careful consideration must be given to the scope of the Financial Services Compensation Scheme and which customers it is intended to protect. Any widening of the scope of eligibility could make the UK significantly less attractive to investors.
“Changes could also mean a wholesale reduction in the number of branches operating in the UK as carriers may decide that subsidiarisation of currently authorised branches would not suit their operating strategy.”
The PRA’s original proposals were outlined in its Discussion paper 2/23 – FSCS general insurance limit. The IUA submitted a formal response to the consultation on behalf of its member companies earlier this year. The decision on the definition of ‘small business’ was confirmed in the regulator’s statement CP6/24 – Occasional consultation paper: April 2024.
