Many of you reading this, if you’re an IFA or an insurance broker, may have just received or will be about to receive an invoice from FSA for a further FSCS levy for 2012/13.
We have announced this week interim levies of £20mn on investment intermediaries and £16mn on insurance intermediaries.
These levies are in fact modestly lower than we expected when we published our Plan & Budget in February. But I don’t expect that to be much consolation to the businesses affected.
We are very conscious just how difficult these further demands will be for businesses to absorb in what is anyway a tough climate.
So why have these interim levies arisen?
The fairly obvious answer to that is that these demands reflect higher compensation costs for FSCS than we expected when we set our levies for 2012/13 back in the spring of last year. That means that the levies we raised then will not be sufficient to meet the compensation we now expect to pay before the 2013/14 levy becomes available from July.
In particular, we face escalating PPI claims. And, on the investment side, we must meet continuing claims from investors as a result of the failures of Pritchard Stockbrokers and Worldspreads Ltd.
Meeting these claims from investors who have lost money in these failures and from consumers mis-sold payment protection insurance is why FSCS exists. Our ability to do so reinforces the public’s confidence in the industry and its products.
So far, so obvious.
But the interim levies also illustrate some important things about the current arrangements for funding FSCS.
One is the simple unpredictability of the demands on us. This is the [fourth] consecutive year in which we’ve had to come back to one part of the industry or another for more money.
It underlines that, even over periods as short as a year, FSCS often has no visibility of impending failures when the annual levy is set or, even if it does, cannot readily quantify claims before they arrive.
Another thing these latest interim levies illustrate is that FSCS is always conservative when we do set levies. We try hard to avoid taking capital out of the industry before we need it and so set levies to meet only those compensation costs we can be reasonably confident about.
The effect, in a pay-as-you go system, of unpredictability of demand allied to conservatism of forecasting is, inevitably, to increase the risk that FSCS needs to come back to ask the industry for more money.
Now this approach clearly has downsides for the industry. It is very difficult to budget for unforeseen and unforeseeable interim levies, although we do our best to give as much advance warning as possible.
That is why, as part of the FSA’s review of FSCS’ funding, we have looked at ways of smoothing our levies over a three year period while sticking to the principle that we should not ask the industry for more money that we need. We shall publish a paper shortly setting out our proposed approach to achieve this.
It’s also why readers of previous blogs will know that I personally would not want to rule out pre-funding for all time.
Pre-funding would be a fundamental change of approach because it would involve taking money from the industry ahead of need. Its upside, on the other hand, is that it would lead to predictable demands which businesses could build into their business models.
I think it’s very much for the industry to weigh these trade-offs and reach a view about where the balance of advantage (or disadvantage) lies.
But every interim levy FSCS raises reminds us that this is a real issue and a real choice.