The Council of Financial Regulators wants the cap on payments under a proposed policyholder protection scheme reduced to $20,000 from the $50,000 originally proposed.

The council’s findings come after consultations with the industry, with insurers opposing a scheme that would financially penalise them for the failure of a competitor.

The idea of financial support for consumers after a company collapse was first raised by HIH Royal Commissioner Justice Neville Owen, and a study on financial system guarantees was commissioned by the Federal Treasury from Melbourne University’s Kevin Davis three years ago.

Treasury took the report in 2004 and passed it to the Council of Financial Regulators for further work. The council – made up of leaders from the regulatory and business sectors – gave its comments to Treasury in August last year.

It recommended that the Australian Prudential Regulation Authority run a limited policyholder protection scheme to be funded after a collapse. Treasury then asked it to discuss the issue with the insurance and banking industries.

After providing Treasury with a summary of the consultation, the council has now suggested a number of changes.

According to the Reserve Bank’s Financial Stability Review, the industry doesn’t see why it should have to pay for the failure of a competitor.

“One… concern expressed by industry during consultation was that levies on surviving institutions, in the event that an institution failed, could adversely affect the profitability and stability of surviving institutions,” the report said.

Although the industry recognises the need for some kind of compensation arrangement for consumers, it doesn’t want to pay for it.

“[The insurance industry’s) opposition to the proposal relates to the broader regulatory environment for insurance and concerns on a range of regulatory matters that are outside the ambit of the council’s management work,” the paper said.