22nd July 2015
ACCOUNTING FOR OURSELVES
FSCS published its Annual Report and Accounts last week.
I’m not naïve enough to expect our Annual Report, let alone the accounts, to be compulsory reading for those of you who read my blogs. Nevertheless, at a time when our levies on the industry are under scrutiny – rightly – the Annual Report sets out important information about our strategy and performance. It enables readers to judge FSCS’ value for money for themselves.
So how should a reader interested in assessing whether FSCS is good value go about it?
This is not the straightforward question it might appear to be at first sight. Surely, you might say, FSCS’ productivity and value can be measured simply by calculating the unit cost of claims handled and how those unit costs have changed over time?
If only it were that simple. It’s not for three important reasons.
The first, and most important, is that FSCS’ workload is unpredictable and volatile. We must not only provide a good service to consumers in the here and now when market conditions are relatively benign, but we must also be ready to provide just as good a service in the face of a major failure or even a financial crisis on the scale of 2007-08.
We can’t predict when the next crisis will occur, but we can be certain that it will happen sooner or later. When it does, financial stability depends critically on FSCS’ ability to protect consumers whose savings, insurance policies or investments are at risk.
This means that FSCS must have the capacity to scale up quickly and efficiently and, as important, to reduce its capacity again once the crisis has passed. To give you an idea of what this means: FSCS handled just under 54,000 claims of all sorts in 2014-15, paying out £327 million in compensation. But since we were established in 2001 our workload has fluctuated between a low of 8,000 claims in 2002-03 to a high of 200,000 claims in 2008-09. Compensation payments have ranged from £82 million in 2007-08 to £20 billion in 2008-09.
This is why FSCS’ business model is to outsource the handling of the great majority of claims so we can pass on the volume risk to organisations better equipped to manage it. It is also why we have invested in a new claims handling platform - Connect – which will enable consumers to make claims on-line and which our out-source partners will share.
I am very clear that the investment in Connect will enable FSCS to provide a better service in future and to scale up and down our effort more efficiently. But, as the Annual Report states, the cost of Connect has significantly exceeded our initial estimate and, for this reason, I have commissioned an independent “lessons learned” review to establish how FSCS can manage major change projects better in future.
The second reason that calculating straightforward unit costs won’t work as a productivity measure is because FSCS’ workload varies not only in volume but in the nature of claims. So our productivity is flattered by large scale failures involving relatively straightforward judgements – bank or building society failures where pay-out is through an automatic process which is very efficient indeed – but looks less good when we receive complex investment claims where FSCS has to determine eligibility and to quantify losses.
As the Annual Report explains, our workload in the recent past has tilted more in the direction of complexity. The self-invested personal pension (SIPP) claims with which we are now dealing are a very good example of that.
And, finally, the third reason FSCS’ productivity is hard to measure is that handling claims is only part of what we do.
We also, for example, make recoveries from the estates of failed businesses and third parties who shared responsibility for consumers’ losses. Our approach is straightforwardly commercial: we pursue recoveries only where it is economic to do so. But both the costs and returns can be very high. So, as the Annual Report records, we have spent roughly £20 million pursuing recoveries arising from the 2009 failure of Keydata. But that expenditure has resulted in gross recoveries of around £120 million.
So we have returned around £100 million to the industry which funded the compensation and administrative costs of the Keydata failure.
In 2014-15 FSCS recovered nearly £560 million in all.
There are other things FSCS does which sail under the radar: the preparations with our partners to resolve firms at risk which do not, in the event, fail; the wider contingency planning for future crises; the upgrading of our systems and capacity to handle new legal requirements such as the Deposit Guarantee Schemes Directive which came into effect on 3 July.
In short, there’s more to FSCS than meets the eye. The Annual Report and Accounts is a good place to look for an overview of our activity.