The controversy surrounding funding of the UK’s Financial Services Compensation Scheme (FSCS) continues, with insurers and brokers disagreeing over the latest funding plan.

The FSCS provides last resort compensation for consumers with valid claims that a regulated financial services firm cannot meet, usually because of insolvency.

The scheme has several funding classes based on the type of business the regulated firms carry out, and each firm must financially contribute to the scheme up to an annual threshold.

UK insurance brokers have cried foul over the funding model in the past, after a scandal involving the mis-selling of payment protection insurance by unassociated credit brokers left them paying millions in extra compensation into the scheme.

Earlier this year, the Financial Services Authority (FSA) confirmed it will maintain the current funding classes going forward, but that it will introduce new annual thresholds based on affordability.

The FSA will also consult on plans to broaden the funding base of its proposed retail pool, an additional fund that would be triggered if one or more of the funding classes reached its threshold. 

It now proposes to fund the retail pool via contributions from both intermediaries and insurers.

The British Insurance Brokers’ Association (BIBA) has “cautiously” welcomed the plans, while expressing disappointment that insurance brokers were not granted their own funding class to completely avoid the possibility of paying for other groups’ mistakes or misdeeds.

BIBA CEO Eric Galbraith says the reforms are “essential to reduce the future financial burden of the FSCS on brokers for areas that they are not responsible for”.

But the Association of British Insurers (ABI) has criticised the new measures, saying it will leave insurers paying for the failure of other financial institutions.

Under the regulator's original proposals for the retail pool, it was to be funded by intermediaries to cover the collapse of other intermediaries, but the consultation now includes the proposal that insurers would also be required to contribute funds. 

The ABI says the proposal is “an unhelpful step backwards”.