Funding

FSCS is funded by levies on firms authorised by the FSA. FSCS's costs are made up of management expenses and compensation payments

Under a new funding system that started on 1 April 2008, for the purposes of funding FSCS compensation costs, the FSCS levy is split into five broad classes:

  • deposits,
  • life and pensions,
  • general insurance,
  • investments, and
  • home finance.

With the exception of the deposits class, each broad class is divided into two sub-classes based on provider/intermediation activities. Each of the "sub-classes" is made up of firms which are providers or intermediaries and engage in similar styles of business with similar types of customer.

The sub-classes are based on the activities a firm undertakes (and are aligned to their FSA permissions). A firm could be allocated to one or more sub-classes according to the activities that it undertakes.

Thresholds

Each firm's contribution is calculated on the tariff base applicable to the relevant sub-class. Each firm contributes proportionally. A threshold for each sub-class is set by the FSA by reference to what a particular sub-class or class (taken as a whole) can be expected to afford in a year. The threshold sets the maximum that FSCS can levy for compensation in any one year. The model operates on the basis that a sub-class will meet the compensation claims from defaults in that sub-class up to the threshold. Once a sub-class reaches its annual threshold, the other sub-class in that broad class will be required to contribute to any further compensation costs up the threshold for the class as a whole. A layer of cross-subsidy is then available from the general retail pool, through which firms in the other broad classes support any other broad class which has reached its overall threshold, up to the overall limit of £4.03bn

Further information on fee blocks and tariff data is available from the FSA

General retail pool

The general retail pool is above the broad classes. The total levy on all classes under the general retail pool provides an annual capacity of about £4.03bn to FSCS unless defaults arise in the home finance intermediation sub-class, in which case the total capacity is £4.10bn. This is due to the fact that the £70m contribution from home finance providers can be levied only for defaults in the home finance intermediaries' sub-class.

Transitional arrangements for the new system

As part of the 'clean break' transitional arrangements for the new system, at the close of business on 31 March 2008 FSCS confirmed the fund balances (credit and debit as appropriate) for each of the former contribution groups and identified how much each qualifying firm was owed by, or owed to, FSCS. FSA, acting as agents for FSCS, will then include this firm-specific credit or debit with that firm's 2008/09 consolidated fees and levies invoice, in a way that is clearly identifiable.

Beginning in June 2008 during the normal fees and levies billing cycle, each firm will receive:

  • a credit or debit note for their 2007/08 FSCS balance;
  • a single invoice for regulatory fees and levies (FSA, FOS, FSCS and FRC) for 2008/09; and
  • a letter that will state the total net amount to be collected or refunded by the FSA.

The 2008/09 levy amount for individual firms will depend on what credit (or debit) they receive, based on 2007/08 tariff data in their previous contribution group(s), combined with their share of the funding requirement under the new sub-class(es), based on 2008/09 tariff data.

Any claims paid or levies raised after 1 April 2008 will be based on the new model.

Indicative levy examples

To help firms estimate their FSCS liability for 2008/09, FSA has published some examples showing the likely combined impact on typical smaller and medium-sized firms of:

  • the reduced levy for this year; and
  • the effect of the 'clean break' transitional arrangements, which are described above.

These can be found on the FSA website.

Funding rules

Full details of the funding rules for FSCS are in the FSA's Handbook under Redress, Compensation. The main rules relating to funding are set out in FEES 6.