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Financial Services Act 2010

Financial Services Compensation Scheme

187.The FSCS is the scheme established by the FSA under Part 15 of FSMA to compensate customers of authorised persons when they firms are in default, that is, unable or likely to be unable to pay claims.

Section 16: Contribution to costs of special resolution regime

188.This section inserts new sections 214B, 214C and 214D into FSMA to replace the existing section 214B (inserted by section 171 of the Banking Act 2009).

189.Existing section 214B confers a power on the Treasury to require the Financial Services Compensation Scheme (“the FSCS”) to contribute to the costs incurred in applying the stabilisation powers of the special resolution regime (“the SRR”) (established in Part 1 of the Banking Act 2009) to a bank that is failing. The amount that the FSCS can be required to contribute is limited to the amount of compensation that the FSCS would have had to pay to depositors if the failing bank had entered into insolvency (i.e. if the SRR powers had not been used), net of any amounts the FSCS would have recovered in that insolvency. The section provides for an independent valuer to be appointed to calculate this likely amount of recovery.

190.New sections 214B to 214D restate the provisions of existing section 214B with corrections and clarifications, and make provision for the calculation of amounts owed by the FSCS. Subsection (2) of section 16 provides for the amended provisions to apply with retrospective effect from 19 November 2009 (the date of introduction of this Act) to allow interest to be taken into account in calculating FSCS contributions from that date onwards in cases where a stabilisation power was exercised before the commencement of this section.

191.New section 214B allows the Treasury to include interest costs in the calculation of expenses incurred in connection with the exercise of the stabilisation power. Subsection (6) provides for the Treasury to set the rate at which that interest is to be calculated and the interest rate to be used in calculating the maximum amount the FSCS may be required to contribute.

192.New section 214C provides for the maximum amount that the FSCS may be required to contribute. This is limited to the notional net expenditure, which is the amount that the FSCS would have paid in the hypothetical scenario where the stabilisation power had not been exercised and the bank had entered insolvency proceedings, minus the actual net expenditure (i.e. any actual payments the FSCS has made in respect of the resolution, net of any recoveries made). Subsections (5) and (6) allow for interest to be taken into account in calculating this expenditure.

193.New section 214D makes further provision supplementing new sections 214B and 214C. New provisions include an express obligation on the FSCS to calculate the amount and the timing of compensation payments in the hypothetical scenario; provision for appointment of an independent valuer to calculate the timings of recoveries likely to be made by the FSCS in that scenario and provision for the Treasury to specify principles to be taken into account by the independent valuer and the FSCS when making such calculations. Subsection (6) extends the existing subsection 214B(3)(b) by providing for independent verification of other matters as well as the expenses incurred in section 214B(2). Subsections (8) and (9) make revised provision for the situation when the FSCS is required to contribute to the costs of resolution before the end of the resolution.

Section 17: Power to require FSCS manager to act in relation to other schemes

194.This section, which inserts new Part 15A into FSMA (comprising sections 224B to 224F), extends the scope of the FSCS manager’s powers to enable it to make payments on behalf of another compensation scheme or arrangement that pays compensation in respect of institutions that provide financial services, including institutions that are not authorised persons under FSMA.

195.New section 224B defines the terms used, including the kinds of scheme or arrangement under which the Treasury can require the FSCS manager to act on behalf of another person paying compensation to customers of financial services firms (“the relevant scheme”). Subsection (9) makes clear that the provisions of new Part 15A apply equally in cases where the relevant scheme is operated by the UK Government. New section 224C provides that if compensation is payable under a relevant scheme, the Treasury may issue a notice requiring the FSCS manager to act on behalf of the relevant scheme’s manager. The notice will specify the functions to be performed by the FSCS manager on behalf of the manager of the relevant scheme.

196.Section 224D provides that the FSCS manager may decline to act if a ground in section 224E is met, and a notice to this effect is given to the Treasury. The grounds are: where the FSCS manager is not satisfied that it will be able to obtain the necessary information, advice or assistance from the administrator to comply with the notice; where it is not satisfied that funding is being provided to meet the expenditure that it will incur in acting on behalf of the relevant scheme manager; where it is of the opinion that complying with the notice would detrimentally affect the exercise of its FSCS functions; where the manager of the relevant scheme has not given an undertaking not to bring proceedings against the FSCS manager; or where there are no arrangements for the reimbursement of expenses arising out of claims brought against the FSCS manager by third parties.

197.New section 224F enables the FSA to make rules in connection with FSCS manager acting as a paying agent on behalf of relevant schemes. This includes conferring a power on the FSCS manager to impose levies to cover its expenses under this section; however if the FSA do impose such a power, it may be exercised only if the FSCS manager has tried and failed to obtain reimbursement of its expenses elsewhere.

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