London’s investment banks are to be asked to stump up more than £1 billion to compensate consumers in the event of catastrophic failure by a major financial institution in Britain, The Times has learnt.

Until now wholesale firms such as Goldman Sachs, JP Morgan and Deutsche Bank have been exempt from any liability because they have no retail customers in Britain. But new proposals from the Financial Services Authority are exected to argue that authorised wholesale firms should shoulder some of the financial pain in the event of a major collapse.

They are to be asked to underwrite a new “pool of last resort” within the Financial Services Compensation Scheme (FSCS), which would operate in the event of a major collapse.

Investment bankers are furious because the proposed reform blurs the distinction between the tightly regulated retail financial services sector and the lightly regulated wholesale sector. However, others in the City argue strongly that wholesale firms directly benefit from the stability of Britain’s financial system and the public confidence in it.

Currently, retail firms – from clearing banks and fund managers to insurers and financial advisers – are in total liable to pay up to £5.6 billion to the FSCS in any one year.

It is thought that investment banks could be limited to a maximum payout of £1 billion to £2 billion.

The FSCS pays out to consumers who lose out because financial services companies fail. It has levied £871 million in fees from retail firms since its inception in December 2001, paying redress to the victims of dozens of small failures.

It runs on a “pay as you go” basis, with levies charged according to the level of compensation needed. Firms are classified by broad product category and face larger levies when there is a failure in their peer group.

Investment banks have until now have escaped all but a peppercorn charge for the FSCS’s basic costs.

The FSA has been reviewing the funding of the FSCS for more than 18 months and is expected to unveil its proposals in a consultation document in March.

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