IUA welcomes PRA’s decision to halt FSCS alterations in UK

The International Underwriting Association has expressed approval for a recent decision to halt proposed alterations in the Financial Services Compensation Scheme (FSCS).

The Prudential Regulation Authority (PRA) had entertained the idea of expanding the scheme’s coverage by redefining the term ‘small business’.

The IUA contended that such action would significantly alter the risk-sharing arrangement within the UK insurance sector. Given that the current definition already encompasses the vast majority of small and medium-sized enterprises, expanding the scope would only bring the scheme to businesses likely possessing sufficient financial and legal resources, thus not needing its protection.

Additionally, the IUA’s response to the proposal underscored potential unintended repercussions for insurance entities categorised as third-country branches in the UK. These companies are authorised based on having up to £500 million in FSCS liabilities. Without adjusting this threshold, any substantial expansion of the compensation scheme’s scope could necessitate overnight re-authorisations of third-country branches as subsidiaries. The PRA has confirmed that it will maintain its current definition of ‘small business’ without making any changes.

Helen Dalziel, Director of Public Policy at the IUA, commented: “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,” further added Dalziel.

The PRA’s initial proposals were detailed in its Discussion Paper 2/23 titled “FSCS General Insurance Limit.” Earlier this year, the IUA formally responded to the consultation on behalf of its member companies. The decision regarding the definition of ‘small business’ was affirmed in the regulator’s statement CP6/24 titled “Occasional Consultation Paper: April 2024.”

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