Today FSCS announces its levies for 2014-15.  If you’re on the receiving end of these levies, you will probably just look at the bottom line and compare it to last year’s levy or to the indicative numbers we published in January.

If so, you may – depending on which sector of the industry you’re in – see this year’s levies as good news. For most sectors, the final levy is down on January’s indications.  Not including the legacy costs of the 2008 banking failures, we’re levying £276 million in total, compared to an indicative levy of £313 million.

It’s worth emphasising, however, that these levy numbers contain several moving parts. They reflect the claims we expect to receive. But they also take into account the recoveries we expect to make from the estates of failed businesses and from third parties who, in our view, share responsibility for consumers’ losses.

It’s easy to lose sight of these recoveries, but they make a big difference to industry’s costs. That will be clear from today’s announcement because recoveries are helping to reduce what could have been a higher bill in some sectors.

Last year – in 2013-14 – FSCS recovered £336m.  Of that, just under £80m were recoveries associated with past investment failures, particularly Keydata.

We expect to make further substantial recoveries in 2014-15.

In some cases, we shall return these recoveries to the industry.  Fund managers who contributed to the Keydata levy will receive a proportionate cheque, for example.  The recoveries due to investment intermediaries will be used by FSCS to offset compensation costs. 

And, in case you’re wondering, our recoveries greatly exceed the costs we’ve incurred to achieve them.  We only pursue recoveries where we judge it’s cost-effective to do so.  

We keep this cost-effectiveness test under continuing review. It means, among other things, that we would unlikely to pursue recoveries from a third party to the point of forcing a business into insolvency because the returns would not justify it. Our test is purely economic.

So recoveries do make a difference to the costs FSCS passes onto the industry.

But, of course, the main determinant of our levies are the claims we expect to receive and compensation we expect to pay in the year ahead.

These, as always, are volatile and hard to predict.  That is why we moved to a three year moving average of past claims as our approach to calculating the levy.

We will, though, substitute a falling or rising trend where it seems clear that that is more likely to get us closer to the right answer. In doing so, we are striving to provide the industry with the best information possible to aid planning.

So, for example, we have tentatively come to the conclusion in setting this year’s levies that PPI claims may have peaked and may now be on a downward trend.  I would caution that what we have interpreted as the beginning of the downward slope may still turn out to be no more than a pause for breath before the upward trend resumes.  But it illustrates that FSCS constantly interrogates the information we have in order to ensure our levies are as soundly based as the inevitable uncertainty allows.

In short, levying is not an exact science, but nor is it a shot in the dark.  It reflects the hard work which FSCS undertakes to maximise recoveries on behalf of the industry.  And it seeks, in forecasting compensation costs, to use the best information available to reduce the risk that we either take more money from the industry than we need or have to come back to ask for more.

So, although levying is not an exact science, it is something on which we continually try to provide the industry with the best information possible in an unpredictable world. We see it as part of our commitment to be open, transparent and professional. And that is a key element of our vision and strategy for the next five years.