This chapter is relevant to:

1. (1)

   the FSCS;

2. (2)

   eligible claimants; and

3. (3)

   firms.

This sourcebook is principally relevant to the FSCS. It sets out the circumstances in which compensation may be paid, to whom compensation may be paid, and on whom the FSCS can impose levies to meet the costs of paying compensation (see in particular COMP 3, 4, and FEES 61). It also describes how the FSCS is to calculate compensation in particular cases (see COMP 12).

Claimants and their advisers will be particularly interested in the sections of this sourcebook which deal with eligibility for claiming compensation, the way that the FSCS calculates compensation, and how they can make a claim. For convenience, the relevant parts of this sourcebook are highlighted in a list of questions and answers in COMP 1.3.3 G.

Firms will be particularly interested in 1FEES 61, which deals with levies and COMP 16 which deals with disclosure requirements for firms that accept deposits.

Under section 212 of the Act (The scheme manager), the FSA must establish a body corporate to exercise the functions that are conferred on that body corporateby Part XV of the Act, dealing with compensation. This body is the Financial Services Compensation Scheme Limited, a company limited by guarantee (FSCS).

The FSA is also required, under section 213 of the Act (The compensation scheme), to make rules establishing a compensation scheme. These rules are set out in the remaining chapters of this sourcebook, and are directed to the FSCS, claimants and potential claimants, and firms.

The FSCS will only pay claims if a firm is unable or likely to be unable to meet claims against it because of its financial circumstances. If a firm is still trading and has sufficient financial resources to satisfy a claim, the firm will be expected to meet the claim itself. This can, for example, be an amount the firm agrees with the claimant, or the amount of an Ombudsman award from the Financial Ombudsman Service.

COMP 1 consists of guidance which is aimed at giving an overview of how this sourcebook works. The provisions of COMP 2 to 162 cover who is eligible, the amount of compensation and how it might be paid, and disclosure requirements for firms that accept deposits.

This sourcebook is one of the means by which the FSA will meet its regulatory objectives of securing the appropriate degree of protection for consumers, contributing to the protection and enhancement of the financial stability of the United Kingdom3 and maintaining confidence in the UK financial system. 3

By setting up the FSCS and making rules that allow the FSCS to provide compensation at a level appropriate for the protection of retail consumers and small businesses, the FSA enables consumers to participate in the financial markets with the confidence that they will be protected, at least in part, should the relevant person with whom they are dealing be unable to satisfy claims against it.

While this sourcebook deals with the main powers and duties of the FSCS, it does not provide the complete picture. Other aspects of the operation of the FSCS are dealt with through the powers of the Financial Services Compensation Scheme Limited under company law (such as the power to borrow, to take on premises, etc.).

1. (1)

   In addition, the Act itself confers certain powers upon the FSCS, such as a power under section 219 of the Act (Scheme Manager's powers to require information) to require persons to provide information. These powers are not, therefore, covered by this sourcebook.

2. (2)

   Of specific relevance to the way in which the FSCS fulfils its responsibilities is the relationship between the FSCS and the FSA. This is covered in a Memorandum of Understanding which can be found on the FSA website www.fsa.gov.uk.

The FSCS also provides information to claimants and potential claimants about the way the FSCS works and the procedures that need to be followed when making a claim. The FSCS can be contacted at 7th Floor, Lloyds Chambers, 1 Portsoken Street, London E1 8BN, or by telephone or fax (Tel: 020 7892 7300 or Fax: 020 7892 7301), or by e-mail (enquiries@fscs.org.uk).

Information about the operation of the FSCS and how to claim is also available from the FSCS website (www.fscs.org.uk).

Incoming EEA firms which are conducting regulated activities in the United Kingdom under a BCD, IMD, MiFID3 or UCITS Directive passport are not required to participate in the compensation scheme in relation to those passported activities. They may apply to obtain the cover of, or 'top-up' into, the compensation scheme if there is no cover provided by the incoming EEA firm'sHome State compensation scheme or if the level or scope of the cover is less than that provided by the compensation scheme. This is covered by COMP 14.221

If an incoming EEA firm "tops-up", and then becomes insolvent, the Home State compensation scheme will pay compensation for claims up to the limit and scope of the Home State compensation scheme, with the FSCS paying compensation for the additional amount in accordance with the provisions in this sourcebook.

The Deposit Guarantee Directive3and Investor Compensation Directive/s3 require the FSCS to make arrangements with the relevant Home State compensation scheme regarding the payment of compensation (COMP 14.3.1R).

The FSA has exercised its power under section 316 of the Act (Direction by Authority) to direct inCOMP 1.5.4 G - COMP 1.5.6 G1 that certain core provisions in the Act should apply to members of the Society of Lloyd's (an "insurance market direction"). The effect of the direction is that the FSA may, in relation to members, and in respect of insurance market activities carried on by them, exercise any of the statutory powers conferred by the provisions which are applied by the direction. Those include the powers in Part X to make general rules and give guidance and also the powers in Part XV to make rules for the establishment and operation of a compensation scheme. Accordingly this sourcebook makes provision for the payment of compensation by the FSCS in certain cases arising from insurance business carried on by members, and for raising levies on the Society.

The effect of COMP 1.5.2 R(4) and COMP 7.2.4A R, and subject to COMP 7.2.4 R(2), is that any recovery obtained by FSCS is retained by FSCS up to an amount equal to the cost to FSCS of paying compensation. To the extent that the Society is entitled to any part of the recovery (for example by agreement with FSCS) it is only paid out of any excess up to a maximum amount equal to that paid out of the Central Fund. Any recovery in excess of the compensation (including payment from the Central Fund) received by the policyholder is paid to the claimant in accordance with COMP 7.2.4 R regardless of whether the Society receives the full amount paid from the Central Fund.

1The insurance market direction in COMP 1.5.5 D is intended to protect the interests of policyholders and potential policyholders by:

1. (1)

   providing for the application of the compensation scheme in respect of contracts of insurance issued by members; and

2. (2)

   providing for the application of such other provisions of the Act as will enable the application of the compensation scheme to be effective in relation to insurance market activities carried on by members.

1 Section 317(2) of the Act (The core provisions) provides that references in an applied core provision to an authorised person are to be read as references to a person in the class to which the insurance market direction applies. In particular, with effect from 15 October 2003, references to a relevant person in Part XV of the Act include a person who was a member at the time the act or omission giving rise to the claim against him took place.

1The compensation scheme will not compensate members or former members if firms are unable to satisfy claims made in connection with regulated activities relating to their participation in Lloyd's syndicates. Separate rules and guidance are therefore needed.

1The arrangements referred to in COMP 1.5.8 R:

1. (1)

   will not compensate losses arising only as a result of underwriting or investment risk to which individual members or former members who were individual members are or were exposed by their participation in Lloyd's syndicates;

2. (2)

   may be restricted to compensation for losses arising out of fraud, dishonesty or failure to account; and

3. (3)

   should cover all regulated activities carried on by underwriting agents relating to Lloyd's syndicate capacity and syndicate membership.

1The arrangements referred to in COMP 1.5.8 R should have a governance structure that is operationally independent from the Society, but which is nevertheless accountable to the Society for the proper administration of the compensation arrangements.