2008-09 levy FAQs
1. Why did FSCS reduce the overall levy since it published its Plan and Budget?
FSCS estimated the possible contribution group fund balances to the end of 2007/08 as part of producing its Plan and Budget: 2008/09. This was based on a forecast of the likely claims volumes, costs and recoveries to the end of the financial year. Claims volumes, and so costs, continued to slow during the last few months of 2007/08. This meant that the fund balances for most of the former contribution groups were higher than anticipated in the Plan and Budget. As a result, we were able to reduce the "net" levy to the industry.
2. How does the "clean break" exercise work?
The new funding regime brought with it a "clean break" from the previous system. FSCS produced its 2008/09 levy from a zero base, and fund balances both positive and negative in the previous contribution groups (with the exception of deposits) are being passed back to the relevant qualifying firms as a credit or an invoice as part of the fees and levies invoicing process. Previously, FSCS would carry forward any fund balances to offset the costs they expected for the contribution groups in the next year.
3. Why did the former A7 and A9 contribution groups have a deficit going into the new funding system?
The deficits in A7 and A9 relate to the costs of split capital investment trusts claims against Exeter and BFS. As mentioned in previous editions of Outlook and the Plan and Budget, FSCS did not levy to fund these costs during 2006/07 or 2007/08.
In 2006/07, the FSCS carried forward splits-related costs of £667,000 because at the time it was unclear which contribution groups would bear these costs. In 2007/08, FSCS incurred additional costs and, after discussions with the trade associations, agreed it would not raise a levy until the volume and value of claims as well as the liability for them was clearer. FSCS provided updates to the industry on its processing of splits claims in its industry newsletter, Outlook, and also in its Plan and Budgets for the past two years. FSCS declared both Exeter and BFS in default during 2007/08 and started processing claims. This allowed the Scheme to assess the costs of compensation for splits claims and also to determine which contribution groups would be liable for the costs.
There was a funding deficit of some £9.28m for splits claims relating to the previous contribution groups A7 & A9 as at 31 March 2008. The majority of Exeter claims have been allocated to the former A9 contribution group and most BFS claims have been allocated to the former A7 contribution group. Relevant firms in these contribution groups are receiving a debit note as part of the levy process as a result.
4. When did FSCS warn us this levy demand was coming?
FSCS provided a regular flow of information to the trade and industry organisations during the last two years on split capital investment trust claims. It also provided information in its Plan and Budgets as well as information in its industry newsletter, Outlook. In these, FSCS said it would not levy for the costs of splits claims until it could be more clear about the likely volume and value of claims as well as which of the former contribution groups would be liable for the costs. In line with representations from trade organisations and individual firms, FSCS felt it was prudent not to levy firms until it resolved these issues.
5. Which companies generated the splits claims?
The costs of the claims relates to two firms in default. They are Exeter and BFS. FSCS declared both Exeter and BFS in default during 2007/08 and started processing claims. This allowed the Scheme to assess the costs of compensation for splits claims and also to determine which contribution groups would be liable for the costs. The costs carried forward from these claims resulted in debit balances for the former A7 and A9 contribution groups, which are now being collected by way of 2007/08 invoices on qualifying firms. FSCS expects to deal with the bulk of the remaining splits claims during 2008/09 but claims may continue into 2009/10.
6. Which sub-classes will pay for the costs of splits claims during 2008/09?
Firms in the D1 investments (fund management) sub-class are being levied to fund their share of the costs of new claims for the year 2008/09. Firms in the D2 investments intermediation sub-class will also pay a proportion of their levy towards the costs of splits claims arising from intermediaries. Based on experience to date, this is likely only to relate to a small percentage of splits claims overall.
7. Why did the fund balance in the old A1 accepting deposits sub-scheme carry forward into 2008/09?
The transitional requirements for money transferred from the Deposit Protection Board restricted the use of this money to deposit claims and related funding needs. As a result, the balances in this contribution group fall outside of the transitional "clean break" arrangements for the new funding regime. The remaining funds will continue to be used to pay claims against deposit-takers, such as credit unions, and have been used to reduce the 2008/09 funding requirement in the deposit class under the new funding regime. This is the first time FSCS has had to levy firms in respect of deposit claims.
8. What is the position of firms in the B1 general insurance provision sub-class?
The former A3 general insurance contribution group had a fund balance of more than £72m at 31 March 2008. This is very close to our forecast in the Plan and Budget of a fund balance of about £73m. The position for firms overall is broadly neutral as a result. Firms in the former A3 group also benefited from a £40m refund in January 2008 as a result of higher than forecast recoveries and lower than forecast compensation costs during the year. Despite this near neutral position, qualifying firms in this former contribution group can expect net credits or invoices, as their proportion of the overall tariff base is likely to have changed between the two years.
9. Why are the fund balances for the former A12 and A13 contribution group higher than forecast in the Plan and Budget?
This is due mainly to the lower than expected volumes of mortgage endowment claims and related costs during 2007/08.
10. How has the fund balance in the former A16 (IFA pensions review) been allocated to firms?
The A16 contribution group fund balance is being distributed between providers and intermediaries in proportion to their contributions in 2007/08, which was based on the PIA pensions review compensation costs levy in 2001/02. Pensions review claims will now be allocated and funded through sub-class C2 (life and pensions intermediation). The net amount to be paid by individual firms will depend on their tariff data in 2007/08 and 2008/09. Any firms now allocated to sub-class C2 (life and pensions intermediation) but not previously in contribution groups A12, A13 and A16, will be levied for their share of the full funding requirement (£32.0m) without any adjustments for 2007/08 credits or debits.
11. Does this levy include the potential costs of claims against Pacific Continental Securities?
No. It is too early to say what impact any claims against Pacific Continental Securities might have during 2008/09. FSCS is working through the default process for this firm and it is possible that we may have to issue a separate levy for the costs during 2008/09. The costs of any claims would probably fall to the D2 investments intermediation sub-class. We will keep firms informed of developments.
12. How can I calculate my firm's overall levy demand?
The FSA's fees calculator is available online to help firms calculate their fees and levies. You can also find more information on this website on the final FSCS contribution group balances to 31 March 2008.
13. Can we spread the cost of our levy?
FSCS levies are included on a single invoice covering FSA, FOS and FSCS fees, which is sent out by the FSA. This includes information about the 2007/08 credits or debits for qualifying firms in the former FSCS contribution groups. Details of the payment options are shown on the back of the levy demand. You can find more information on the FSA website or by ringing the FSA's Firm Contact Centre on 0845 606 9966.
