Pressure mounts for levy to rescue ICS

NIC CICUTTI

Pressure is mounting among financial services regulators for a compulsory product levy as the long-term solution to the problems faced by the beleaguered Investor Compensation Scheme.

The Personal Investment Authority, the main financial watchdog, said yesterday that the issue of resolving once and for all the cash crisis facing the ICS had "definitely moved up to the top of the pile".

One option known to be favoured by Colette Bowe, the PIA's new chief executive, is that of a levy on every financial product sold by insurance companies and other product providers.

But other sources inside the PIA said nothing could be put in place until existing problems were resolved. In particular, the regulator will not ask for the pounds 16m its members are supposed to pay out this year until a legal challenge mounted by one insurer, Sun Life, is resolved.

Sun Life is disputing whether it must pay for firms which went bankrupt before even joining the PIA. It has applied for a judicial review on whether it must meet its share of the levy.

In the meantime, the compensation scheme faces a hand-to-mouth existence, relying on occasional cash inflows to meet monthly payouts to investors.

Senior executives within the ICS, which has paid out almost pounds 80m to victims of fraud or bad advice since 1988, are looking to the system operating in the US. The scheme, in place since 1933, operates largely by means of a product levy and has about $800m available in its fund.

A compulsory product levy, which could be as little as 0.1 per cent of every pounds 100 of premiums, would replace the annual cash call made on companies, many of them small independent financial advisers, when one of their number is declared in default.

If it were to be set up, however, a product levy would have to run alongside existing arrangements for up to two years until enough funds were built up.

Hopes that the Government will step in as a banker of last resort, or pass legislation to allow the PIA to raise the money, were yesterday dashed by the Treasury, despite calls for action from Labour's City spokesman, Alistair Darling.

Mr Darling yesterday asked the Chancellor, Kenneth Clarke, what he proposed to do about the problem.

But the Treasury believes this is a matter that must be solved by the industry itself.

It was pointed out yesterday that the PIA is responsible for raising the money needed by the compensation scheme.

If it fails to do so, the ICS itself can individually levy its member firms.