Levy Update

The latest forecasts for the funding classes are set out below and the final decisions on each class will be made in the New Year. The figures are based only on known claims.

In 2018/19, as a transitional funding year, we are levying for a “nine-month” year, for compensation costs from July 2018 to March 2019. As such, lower limits set at 75 per cent of the 12-month annual limits apply. This has a direct impact for the Life and Pensions Intermediation class, for which compensation costs in excess of £75m will be levied on the retail pool.

As predicted in April, we expect to raise a levy on the retail pool for the Life and Pensions Intermediation class, and we expect to raise the supplementary levy on the Deposits and General Insurance Provision classes – our stated policy is to do so where a deficit exceeds £20m and to consider whether to do so if in excessof £10m. The Debt Management class will receive a levy for the first time to fund their retail pool contribution, although we have yet to incur any compensation costs in the Debt Management class

Class Forecast closing position (£m) Comments Reforecast closing position after retail pool contribution (£m) Status
Deposits (SA01) (13.5) Large credit union failure causing adverse variance, supplementary levy expected. (21.3)
 
General Insurance Provision (SB01) (15.0) Large failure of Alpha Insurance causing deficit. Supplementary levy required at same time as retail pool levy. (17.5)
 
General Insurance Mediation (SB02) 8.4 Falling PPI compensation levels should leave surplus to carry forward to next year. (13.0)
 
Life & Pension Intermediation (SC02) (69.1) Retail Pool levy required of £69m, £6m larger than initially forecast due to rising claims volumes of SIPPs and Pension Transfer claims. N/A N/A
Investment Provision (SD01) 22.0 Surplus expected largely due to higher than expected levy receipts. Expect to use surplus to fund retail pool contributions. 7.8
 
Investment Intermediation (SD02) 7.6 Higher than forecasted compensation payments offset by recoveries. Low chance of supplementary levy. (3.1)
 
Home Finance Intermediation (SE02) 7.6 Lower claims volumes and average compensation indicate surplus to carry forward. Low chance of supplementary levy.  4.8
 
Debt Management 0.0 The funding of the retail pool will be the first compensation costs levy in this class. (1.4)  

Classes

GREEN Low risk of supplementary levy

AMBER Medium risk of supplementary levy

RED High risk of supplementary levy

Levy timetable

November 2018 – Outlook and potential supplementary levies for 2018/19.

January 2019 – Final supplementary levy announcement for 2018/19 plus indicative levies for 2019/20 and payment on account amounts.

April 2019 – Final levies for 2019/20.

From 2019/20 FSCS will collect on account levies for the first time. Those firms that pay on account levies for FCA and PRA will from 2019/20 start paying on account FSCS levies. We expect to collect 50 per cent of these firms’ 2018/19 levies – the maximum allowed by the rules.

FCA Classes Class Limit (£m) Contribution to Retail Pool 2018/19 Retail Pool Levy (£m)
General Insurance Intermediation (SB02) 300 31% 21.4
Life & Pensions Intermediation (SC02) 100 N/A -
Investment Intermediation (SD02) 150 15% 10.7
Home Finance Intermediation (SE02) 40 4% 2.9
Investment Provision (SD01) 200 21% 14.2
Debt Management (SK01) 20 2% 1.4
       
FCA Provider Contribution Classes      
Deposit acceptors 110 11% 7.8
Insurers – General 35 4% 2.5
Insurers – Life 70 7% 5.0
Home Finance Providers 45 5% 3.2
  1070 100% 69.1
Deposits (SA01) Original Forecast 2018/19 (£m) Latest Actuals & Forecast 2018/19 (£m) Variance (£m)
B/Forward 2017/18 (0.0) 2.4 2.4
Compensation (4.2) (25.4) (21.2)
Recoveries 0 2.9 2.9
Management Expenses (14.0) (12.3) 1.7
Annual Levy receipts 19 18.9 (0.1)
Forecast Closing Balance 30/6/19 0.8 (13.5) (14.3)
Retail Pool levy contribution (7.2) (7.8) (0.6)
Total (6.4) (21.3) (14.9)

The main variance from the annual levy is because of the failure of the Dial-A-Cab Credit Union at the start of September. FSCS stepped in to protect the London-based credit union’s 1,250 taxi-driver customers. This failure, which cost over £21m, was the largest deposit failure since the financial crisis of 2008.

The higher-than-expected compensation costs are because of the average pay-out value rather than the volume of customers. Dial-A-Cab depositors received an average of £23,000 in compensation, compared to £500 for other credit union failures.

The deficit is partly funded by recoveries from the Legacy Banking failures and other recoveries received this year totalling £2.9m. We plan to raise a supplementary levy, both for the class deficit and the retail pool.

This class will be required to fund a retail pool levy of £8m, so the total deficit to be collected in January will be £21m.

General Insurance Provision (SB01) Original Forecast 2018/19 (Nine Months) (£m) Latest Actuals & Forecast 2018/19 (Nine Months) (£m) Variance (£m)
B/Forward 2017/18 14.6 32.5 17.9
Compensation (96.7) (138.7) (42.0)
Recoveries 1.0 3.9 2.9
Management Expenses (6.9) (5.0) 1.9
Annual Levy receipts 89.0 92.3 3.3
Forecast Closing Balance 31/3/19 1.0 (15.0) (16.0)
Retail Pool levy contribution (2.3) (2.5) (0.2)
Total (1.3) (17.5) (16.2)

FSCS’s total costs for the 2018 financial year are £42m greater than the levy forecast. This is because of a combination of £23m projected for the Danish company Alpha Insurance, which was declared bankrupt on 8 May 2018 – soon after the final levy was announced (and for which no allowance was made) – and an increase in forecast costs for Enterprise Insurance, as further policyholder and claims data is received.

Although the opening balance for the class was better than forecast, this is largely because of the timing of a £13m settlement made just after the start of 2018/19 levy year.

This class will be required to fund a retail pool contribution of £2m, so the total deficit to be collected in January is expected to be £19m.

General Insurance Intermediation (SB02) Original Forecast 2018/19 (Nine Months) (£m) Latest Actuals & Forecast 2018/19 (£m) Variance (£m)
B/Forward 2017/18 4.8 5.3 0.5
Compensation (11.8) (8.1) 3.7
Recoveries 0.0 2.2 2.2
Management Expenses (7.9) (7.5) 0.4
Annual Levy receipts 16.0 16.5 0.5
Forecast Closing Balance 31/3/19 1.1 8.4 7.3
Retail Pool levy contribution (19.6) (21.4) (1.8)
Total (18.5) (13.0) (5.5)

FSCS has not yet experienced the expected increase in PPI claims volumes following publicity around the 29 August 2019 deadline for PPI complaints. As a result, the overall volumes and the overall compensation payment forecast has been reduced by £3m. No supplementary levy is expected.

Levy payers should note, however, that they will shortly be required to fund the compensation claims costs attributable to the failure of Welcome Financial Services Ltd. The funds provided by the firm will be exhausted, having met claims worth a total of £71m, and this is included in the forecast.

This class’s retail pool contribution of £21m will be partly funded by a class surplus of £8m, so the additional levy will be £13m.

Life & Pension Intermediation (SC02) Original Forecast 2018/19 (Nine Months) (£m) Latest Actuals & Forecast 2018/19 (£m) Variance (£m)
B/Forward 2017/18 (20.4) (15.4) 4.9
Compensation (108.7) (116.5) (7.8)
Recoveries 0.0 (0.3) (0.3)
Management Expenses (9.2) (10.8) (1.6)
Annual Levy receipts 75.0 73.9 (1.1)
Forecast Closing Balance 31/3/19 (63.3) (69.1) (5.8)
Retail Pool levy contribution N/A N/A 0
Total (63.3) (69.1) (5.8)

As expected, we shall be raising a supplementary levy for claims on the class, which will trigger the retail pool. This is forecast at £69m.

The Life and Pension Intermediation workstream continues to see the highest volume of new claims.

In 2018, SIPP and other pension transfer-related failures made up 45 per cent of all defaults declared and 83 per cent of resulting claims received. This was due to the larger claims volumes that relate to pension advisor defaults.

Based on recent experience, we now expect the recent increases in SIPP advice-related costs to level off in 2019/20.

Since 2016/17, claims relating to other types of pension transfer have increased significantly, for example British Steel pensions. We expect this trend to continue through 2018/19, with a 49 per cent increase in cost from 2017/18.

Although the opening balance deficit at 1 July was not as large as the forecast because of lower-than-forecast volumes of pension transfer claims between April and June, increased Claims Management Company (CMC) activity in this area has increased claims volumes and uphold rates have risen, which has outweighed a fall in the average compensation values. 

Investment Provision (SD01) Original Forecast 2018/19 (Nine Months) (£m) Latest Actuals & Forecast 2018/19 (£m) Variance (£m)
B/Forward 2017/18 (17.7) (6.8) 10.9
Compensation (34.6) (32.4) 2.2
Recoveries 0.0 0.0 0.0
Management Expenses 0.0 (1.8) (1.8)
Annual Levy receipts 52.0 63.0 11.0
Forecast Closing Balance 31/3/19 (0.3) 22.0 22.3
Retail Pool levy contribution (13.0) (14.2) (1.2)
Total (13.3) 7.8 21.1

The compensation costs are broadly in line with the original forecast and budget and are mainly claims against SIPP operators. We continue to monitor developments in the sector more generally and how they might impact on our approach to claims, notably the recent judicial review challenge of a Financial Ombudsman Service (FOS) decision and a number of SIPP Operator cases that are currently before the Courts. We are now forecasting that SIPP Operator claims will continue to increase and expect to make 1,369 claims decisions compensation claims to the value of £31m in this levy period.

In fact, the opening balance was about £10m higher than expected, because of delays in new claims being processed. Following the changes introduced by the Financial Conduct Authority (FCA), the class also benefited from higher-than-expected levy tariff data returns – generating a greater total levy receipt than expected.

As at 30 July 2018, when the FCA set FSCS levy rates for the class, the tariff base was calculated at £7.17bn. Between this date and the collection of FSCS annual levies, more firms in this class have revised their tariff data upwards in consultation with the FCA over the new rule changes. The effect of this has been that the total levy amount collected by FCA/FSCS in this class is £12.7m higher than originally forecast.

The overall net claims position is as forecast, leaving the surplus levy receipts to the credit of the class, which will fund the retail pool, so that no supplementary levy is likely at this stage. The surplus will be used to fund the retail pool contribution of £14m.

 

Investment Intermediation (SD02) Original Forecast 2018/19 (Nine Months) (£m) Latest Actuals & Forecast 2018/19 (£m) Variance (£m)
B/Forward 2017/18 22.9 31.0 8.1
Compensation (59.0) (68.7) (9.7)
Recoveries 2.8 9.9 7.1
Management Expenses (7.9) (8.5) (0.6)
Annual Levy receipts 42.0 43.9 1.9
Forecast Closing Balance 31/3/19 0.8 7.6 6.8
Retail Pool levy contribution (9.8) (10.7) (0.9)
Total (9.0) (3.1) (5.9)

 

Compensation costs are a little higher than forecast – after allowing for the phasing into this year of the first return of fund payments for Strand Capital Ltd.

The levy was raised on the 36-month forecast approach, allowing for a £14m buffer for potential uncertainties. Compensation for Beaufort Securities Ltd and Beaufort Asset Clearing Services Ltd amounts include £10m paid in September for the first tranche of client money, and client assets costs and a further £22m of costs for the special administration over the remainder of the year. Despite the additional £8m in the opening balance, a supplementary levy will be required to meet the full amount of the retail pool levy. As the class will be required to fund the £11m retail pool contribution, an additional levy of £4m will be required

Home Finance Intermediation (SE02) Original Forecast 2018/19 (Nine Months) (£m) Latest Actuals & Forecast 2018/19 (£m) Variance (£m)
B/Forward 2017/18 (5.8) (2.9) 2.9
Compensation (14.7) (10.0) 4.8
Recoveries 0.0 0.0 0.0
Management Expenses (1.2) (1.4) (0.2)
Annual Levy receipts 22.0 21.9 (0.1)
Forecast Closing Balance 31/3/19 0.3 7.6 7.3
Retail Pool levy contribution (2.6) (2.8) (0.2)
Total (2.3) 4.8 7.1

No supplementary levy is forecast. Despite increased claims volumes, many are rejections and the six-month average compensation is down by £10,000 on the April forecast of £55,000.

Over recent years, costs for this class have been driven by claims against Fuel Investments. We expect to complete 250 or so claims against this firm in this financial year, though there could be more in the pipeline.

The surplus will be used to fund the class’s retail pool contribution of £3m.