Plans by the City watchdog to shake up a compensation scheme for customers of collapsed financial companies could lead to higher insurance premiums.

The Financial Services Authority's proposals have sparked a row with trade body, the Association of British Insurers.

At present, if a firm goes bust customers are bailed out using contributions from companies in the same sector. But the proposed Financial Services Compensation Scheme would see funds pooled from different sectors.

So, for example, insurance companies - where there have been few failures in the past - would be forced to help compensate customers of a collapsed pension company. If this happens, the ABI warns, the cost will be passed on in higher insurance premiums.

An industry source said: 'It is the idea of a general pool of funding that bothers people. It is not equitable for many healthy sectors.'

The FSA wants to reform the FSCS to increase its ability to deal with major corporate collapses.

An ABI spokesman said: 'We are disappointed that the FSA has decided to press ahead with its proposals to reform the FSCS funding arrangements.'