British insurance brokers are facing big hikes in compensation levies despite having little involvement in the financial products responsible for the rising cost of the scheme.

UK Financial Services Compensation Scheme (FSCS) costs have soared following widespread mis-selling of payment protection insurance (PPI) over the past three years.

Some 46 PPI firms have been declared in default in the UK, while claims to the scheme in the relevant broking sub-class are expected to reach £61 million ($104 million) in 2010/11.

The Institute of Insurance Brokers (IIB) says brokers can expect a “massive hike” in their latest invoices from the Financial Services Authority (FSA) as a result.

“Some increases are as much as 800%, and most are due to the mis-selling of payment protection insurance, a product which is very rarely sold by brokers,” IIB CEO Barbara Bradshaw told insuranceNEWS.com.au.

Under the current regulations brokers must carry the can for PPI failures because they are listed in the same sub-class as other general insurance intermediaries – including loan companies that sell PPI alongside personal loans.

Brokers acting for small firms and personal lines clients are expected to be particularly hard hit, because the FSCS is eligible only to those with a turnover of less than £1 million ($1.7 million), with broker levies based on the income earned from eligible clients.

The IIB has lobbied regulators over several years in an effort to force amendments to levy regulations. It says the FSA has agreed to review the scheme and intends to begin formal consultation early next year.