Statement from the Chief Executive
This year our usual bulletin to the industry on FSCS’s final levies for the year ahead – 2019/20 – coincides with important changes to the funding regime.
The changes to the pooling of FSCS’s compensation costs proposed by the FCA Review come into effect. This means that insurance and investment providers are required to contribute to the costs of advice failures. Life, pensions and investment advisers are also grouped together from 2019/20. And FSCS’s protection limit for investments, investment and pensions advice, home finance and debt management rises to £85,000 in respect of firm failures which occur on or after 1 April. We estimate this latter change will add roughly £20 million to compensation costs in 2019/20. The other changes affect the distribution of compensation costs, but not their size.
If aspects of funding regime are changing, the factors driving compensation costs are not. The final levy numbers we are publishing today do not differ markedly from the indicative numbers we set
out in January. There has been a £16m increase since we published our indicative levy in January. So the 2019/20 levy will be £532m.
As in 2018/19, the main driver of the compensation costs falling on FSCS this year will continue to be pension claims. The bulk of these claims will continue to arise from bad advice to transfer retirement savings out of occupational schemes and into SIPPs – usually with a view to investment in risky and illiquid assets. But we have seen some falling off in the rate of growth of these claims which we now expect to number 8,200 in 2019/20 (7,800 last year) compared to our January forecast of 10,600. By contrast, we now expect more claims against the providers of SIPP platforms themselves next year. The result is a fall of £22 million in the levy on life, pensions and investment advisers, but a rise of £38 million in the levy on investment providers which include SIPP platform providers. The latter rise also reflects our expectation that we shall receive roughly 1,000 discretionary management claims arising from the failure of Beaufort Securities.
These trends underline the importance of the greater weight which FSCS intends to give in its strategy for the 2020s to both promoting awareness of FSCS protection and to preventing the mis-selling and advice failures which underlie these costs.
We shall need the support of our partners in the industry and in the FCA in both respects.
We know from our research that awareness of FSCS protection affects both consumers’ propensity to save for retirement and choice of investment to generate a retirement income. We also know that consumers are more likely to seek regulated financial advice when they understand that FSCS protects them in the event of mis-selling. We would like to work with the industry on how best to communicate to consumers the key facts about our protection when they make potentially life-changing decisions about their pensions and retirement savings. This is the more important because around 15% of pensions claims result in losses which exceed our new protection limit of £85,000.
Equally, we want to work with the industry and the FCA on prevention. We gather much valuable insight and intelligence as a result of our work compensating consumers and pursuing recoveries. We believe that, in partnership, we can use this intelligence more systematically and purposefully to identify risks before they eventuate into major mis-selling episodes and to prevent advisers and directors involved in mis-selling re-inventing themselves.
Promotion and Prevention are the counterparts of our continuing and undiminished commitment to be prepared for failures when they occur and to provide an excellent service to consumers who need our protection as a result of failure.